Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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$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

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 $15.00 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%.

Based on the CAPM, what is the firm's cost of equity?

11.56%

10.20%

15.64%

16.73%

13.60%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Foundations of Financial Management

Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta

10th Canadian edition

1259261018, 1259261015, 978-1259024979

More Books

Students also viewed these Finance questions