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

image text in transcribedimage text in transcribedimage text in transcribed

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 $101,000,000 Net plant, property, and equipment Total assets $139,000,000 Liabilities and Equity Accounts payable $10,000,000 $9,000,000 Accruals 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 $14.65 per share, and its noncallable $1,000.00 par value, 20-year, 9.00% bonds with semiannual payments are selling for $930.41. The beta is 1.14, the yield on a 6-month Treasury bill is 4.50%, and the yield on a 20-year Treasury bond is 6.50%. The required return on the stock market is 12.00%, but the market has had an average annual return of 15.00% 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. 7.59% b. 7.35% c. 3.68% d. 3.80% e. 9.80% Keys Printing plans to issue a $1,000 par value, 15-year noncallable bond with a 5.20% annual coupon, paid semiannually. The company's marginal tax rate is 40.00%, but Congress is considering a change in the corporate tax rate to 25.00%. By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted? Do not round your intermediate calculations. a. 0.13% b. 0.78% c. 0.20% d. 0.39% e. 1.56%

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

Options Futures And Other Derivatives

Authors: John C. Hull

11th Edition

013693997X, 9780136939979

More Books

Students also viewed these Finance questions