Assume that you have been hired as a consultant by CGT, a major producer of chem
ID: 2698766 • Letter: A
Question
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
Liabilities and Equity
The stock is currently selling for $15.00 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $1,150.00. The beta is 1.35, 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%. Which of the following is the best estimate for the weight of debt for use in calculating the WACC?
Current assets $38,000,000 Net plant, property, and equipment $101,000,000 Total assets $139,000,000Explanation / Answer
Bond price $1150.00 Number of bonds 40,000 MV of debt = D $ 46,000,000 Stock price = P0 $15.00 Shares outstanding 10,000,000 MV of equity = E $150,000,000 Total MV = D + E $196,000,000 Weight debt = wd = D/Total MV 23.47%