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%
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
Problem 10P
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