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 Net plant, property, and equipment Total assets Liabilities and Equity Accounts payable Accruals Current liabilities Long-term debt (40,000 bonds, $1,000 par value) Total liabilities Common stock (10,000,000 shares) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity $38,000,000 $101,000,000 $139,000,000 $10,000,000 $9,000,000 $19,000,000 $40,000,000 $59,000,000 $30,000,000 $50,000,000 $80,000,000 $139,000,000 The stock is currently selling for $18.75 per share, and its noncallable $1,000.00 par value, 10-year, 8.00% bonds with semiannu payments are selling for $860.14. The beta is 0.96, the yield on a 6-month Treasury bill is 2.00%, and the yield on a 10-year Treasury bond is 4.00%. The required return on the stock market is 13.00%, but the market has had an average annual return of 16.00% during the past 5 years. The firm's tax rate is 25%. What is the best estimate of the after-tax cost of debt? a. 7.70% b. 8.84%
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 Net plant, property, and equipment Total assets Liabilities and Equity Accounts payable Accruals Current liabilities Long-term debt (40,000 bonds, $1,000 par value) Total liabilities Common stock (10,000,000 shares) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity $38,000,000 $101,000,000 $139,000,000 $10,000,000 $9,000,000 $19,000,000 $40,000,000 $59,000,000 $30,000,000 $50,000,000 $80,000,000 $139,000,000 The stock is currently selling for $18.75 per share, and its noncallable $1,000.00 par value, 10-year, 8.00% bonds with semiannu payments are selling for $860.14. The beta is 0.96, the yield on a 6-month Treasury bill is 2.00%, and the yield on a 10-year Treasury bond is 4.00%. The required return on the stock market is 13.00%, but the market has had an average annual return of 16.00% during the past 5 years. The firm's tax rate is 25%. What is the best estimate of the after-tax cost of debt? a. 7.70% b. 8.84%
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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H4.
Transcribed Image Text: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
Net plant, property, and equipment
Total assets
Liabilities and Equity
Accounts payable
Accruals
Current liabilities
Long-term debt (40,000 bonds, $1,000
par value)
Total liabilities
Common stock (10,000,000 shares)
Retained earnings
Total shareholders' equity
Total liabilities and shareholders'
equity
$38,000,000
$101,000,000
$139,000,000
$10,000,000
$9,000,000
$19,000,000
$40,000,000
$59,000,000
$30,000,000
$50,000,000
$80,000,000
$139,000,000
The stock is currently selling for $18.75 per share, and its noncallable $1,000.00 par value, 10-year, 8.00% bonds with semiannual
payments are selling for $860.14. The beta is 0.96, the yield on a 6-month Treasury bill is 2.00%, and the yield on a 10-year
Treasury bond is 4.00%. The required return on the stock market is 13.00%, but the market has had an average annual return of
16.00% during the past 5 years. The firm's tax rate is 25%. What is the best estimate of the after-tax cost of debt?
a. 7.70%
b. 8.84%
c. 10.27%
d. 4.42%
e. 3.85%
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