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
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 |
| $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 $1,000.00 par value, 20-year, 9.00% bonds with semiannual payments are selling for $930.41. The beta is 1.22, 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 25%.
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