Collins Group
the Collins Group, a Leading Producer of Custom

Collins Group
The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below.
$\begin{array}{l}\text { Assets }\\\begin{array}{lr}\text { Current assets } & \$ 38,000,000 \\\text { Net plant, property, and equipment } & 101,000,000\\\text { Total assets }&\$ 139,000,000\\\\\text { Liabilities and Equity }\\\text { Accounts payable } & \$ 10,000,000 \\\text { Accruals } & 9,000,000 \\\text { Current liabilities } & \$ 19,000,000 \\\text { Long-term debt }(40,000 \text { bonds, } \$ 1,000 \text { par value) } & 40,000,000\\\text { Total liabilities }&\$ 59,000,000 \\\text { Common stock ( } 10,000,000 \text { shares) } & 30,000,000 \\\text { Retained earnings } & 50,000,000 \\ \text { Total shareholders' equity } & 80,000,000 \\\text { Total liabilities and shareholders' equity } & \$ 139,000,000\end{array}\end{array}$
The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 40%.
-Refer to the data for the Collins Group. What is the best estimate of the after-tax cost of debt?

A) 4.64%
B) 4.88%
C) 5.14%
D) 5.40%
E) 5.67%