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You are employed by CGT, a Fortune 500 firm that is a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and
You are employed by CGT, a Fortune 500 firm that is a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers. You are on the corporate staff as an assistant to the CFO. This is a position with high visibility and the opportunity for rapid advancement, providing you make the right decisions. Your boss has asked you to estimate the weighted average cost of capital for the company. The balance sheet and some other information about CGT follows below Assets Current assets Net plant, property, and equipment Total assets S 38,000,000 101,000,000 S139,000.000 Liabilities and equity Accounts payable Accruals Current liabilities Long term debt (40,000 bonds, $1,000 par value) Total liabilities Common stock (10,000,000 shares) Retained earnings Total shareholders equity Total liabilities and shareholders equity S 10,000,000 9,000,000 S 19,000,000 40,000,000 59,000,000 30,000,000 50,000,000 80,000,000 S139,000.000 You check The Wall Street Journal and see that CGT stock is currently selling for $7.50 per share and that CGT bonds are selling for $875.00 per bond. The bonds have a S 1,000 par value, a 7.25% annual coupon rate, semiannual payments, are not callable, and a 20-year maturity. CGT's beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The expected return on the stock market is 1 1.50%, but the market has had an average annual return of 14.50% during the past 5 years. CGT is in the 40% tax bracket. Refer to Exhibit 10-1. Which of the following is the best estimate for the weights to be used when calculating the WACC? Select one a. We-68.2%; wa-31.8% b, wc-69.9%; wd-30. 1% c, w.-71.6%; wa-28.4% d, w, = 73.4%; wa = 26.6% e, wc-75.3%; Wa-24.7%
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