1. Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below. Assets Current assets $ 38,000,000 Net plant, property, and equipment 101,000,000 Total assets $139,000,000 Liabilities and Equity Accounts payable $ 10,000,000 Accruals 9,000,000 Current liabilities $ 19,000,000 Long - term debt (40, 000 bonds, $1,000 par value) 40,000,000 Total liabilities $ 59,000,000 Common stock (10,000,000 shares) 30, 000, 000 Retained earnings 50, 000, 000 Total shareholders' equity 80,000,000 Total liabilities and shareholders' equity $139, 000, 000 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 % . a) What is the best estimate of the after - tax cost of debt? b) Based on the CAPM, what is the firm's cost of equity? c) What is the best estimate for the weight of debt for use in calculating the WACC? d) What is the best estimate of the firm's WACC?
1. Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below. Assets Current assets $ 38,000,000 Net plant, property, and equipment 101,000,000 Total assets $139,000,000 Liabilities and Equity Accounts payable $ 10,000,000 Accruals 9,000,000 Current liabilities $ 19,000,000 Long - term debt (40, 000 bonds, $1,000 par value) 40,000,000 Total liabilities $ 59,000,000 Common stock (10,000,000 shares) 30, 000, 000 Retained earnings 50, 000, 000 Total shareholders' equity 80,000,000 Total liabilities and shareholders' equity $139, 000, 000 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 % . a) What is the best estimate of the after - tax cost of debt? b) Based on the CAPM, what is the firm's cost of equity? c) What is the best estimate for the weight of debt for use in calculating the WACC? d) What is the best estimate of the firm's WACC?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:1. Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and
fertilizers, to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below. Assets Current assets $
38,000,000 Net plant, property, and equipment 101,000,000 Total assets $139,000,000 Liabilities and Equity Accounts payable $ 10,000,000 Accruals
9,000,000 Current liabilities $ 19,000,000 Long - term debt (40, 000 bonds, $1,000 par value) 40,000,000 Total liabilities $ 59,000,000 Common stock
(10,000,000 shares) 30, 000, 000 Retained earnings 50, 000, 000 Total shareholders' equity 80,000,000 Total liabilities and shareholders' equity $139, 000, 000
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 % . a) What is the best
estimate of the after - tax cost of debt? b) Based on the CAPM, what is the firm's cost of equity? c) What is the best estimate for the weight of debt for use in
calculating the WACC? d) What is the best estimate of the firm's WACC?
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