Assume that you have been hired as a consultant by a chemical company, a major p
ID: 2688503 • Letter: A
Question
Assume that you have been hired as a consultant by a chemical company, a major producerof 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. Current Assets - $38,000,000 Net Plant, property, & Equipment - 101,000,000 Total Assets - $139,000,000 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 corporate $1,000 par value, 20-year, 7.25% bonds with annual payments are selling for $875.00. The beta is 1.25, the yield is 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 and 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 of the firm's after tax weighted average cost of capital (ATWACC)? D. If during the first year of operations the company's return on assets is 10% was value created or destroyed for the given year? ExplainExplanation / Answer
Assume that you have been hired as a consultant by a chemical company, a major producerof 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. Current Assets - $38,000,000 Net Plant, property, & Equipment - 101,000,000
Total Assets - $139,000,000
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 corporate $1,000 par value, 20-year, 7.25% bonds with annual payments are selling for $875.00. The beta is 1.25, the yield is 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 and the firm's tax rate is 40%.
A. What is the best estimate of the after-tax cost of debt?
answer =5.14%
B. Based on the CAPM, what is the firm's cost of equity?
13.00%
C. What is the best estimate of the firm's after tax weighted average cost of capital (ATWACC)?
8.67%