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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 $(000)
Current Assets 38,000
Net PPE 101,000
Total Assets 139,000
Liabilities and Equity
Accounts payable 10,000
Accruals 9,000
Current libailities 19,000
Long-term debt (40,000 bonds, $1000 par value) 40,000
Total liabilities 59,000
Common stock (10,000,000 shares) 30,000
Retained earnings 50,000
Total shareholders' equity 80,000
Total liabilities and shareholders' equity 139,000

The stock is currently selling for $15.25 per share, and its noncallable $1000 par value, 20-year. 7.25% bonds with semi-annual payments are selling for $875. The beta is 1.25, the yield on a 6-month Treasury bill is 3.5%, and the yield on a 20-year T-bond is 5.5%. The required return on the stock market is 11.5%, but the market has had an average annual return of 14.5% during the past 5 years. The firm's tax rate is 40%.

a) What is the best estimate of the after-tax cost of debt?

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

c) what are the alternative ways to calculate the weights for WACC? please list all the alternatives and discuss under what circumstances these alternatives could be an appropriate choice, respectively?

d) what is the best estimate of the firm's WACC? Justify your answer.

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