Exhibit $10\mathrm{.}1$

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

The stock is currently selling for $$15\mathrm{.}25$ per share, and its noncallable $$1,000\mathrm{.}00$

par value, $20-$year, $9\mathrm{.}00\%$ bonds with semiannual payments are selling for $$930\mathrm{.}41.$

The beta is $1\mathrm{.}22,$ the yield on a $6-$month Treasury bill is $3\mathrm{.}50\%,$ and the yield on a

$20-$year Treasury bond is $5\mathrm{.}50\%.$ The required return on the stock market is

$11\mathrm{.}50\%,$ but the market has had an average annual return of $14\mathrm{.}50\%$ during the

past $5$ years. The firm's tax rate is $25\%.$

Refer to Exhibit $10\mathrm{.}1.$ Based on the CAPM, what is the firm's cost of equity?

$10\mathrm{.}75\%$

$13\mathrm{.}20\%$

$11\mathrm{.}85\%$

$11\mathrm{.}24\%$

$12\mathrm{.}22\%$