Question
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
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 $889.50 per bond. These bonds have a 7.25 percent annual coupon rate, with semi-annual payments. The bonds mature in twenty years. The beta for your company is approximately equal to 1.1. The yield on a 6-month Treasury bill is 3.5 percent and the yield on a 20-year Treasury bond is 5.5 percent. The expected return on the stock market is 11.5 percent, but the stock market has had an average annual return of 14.5 percent during the past five years. CGT is in the 40 percent tax bracket.
28. Which of the following is the best estimate for the weights to be used when calculating the WACC?
A. we = 57.6% and wd = 42.4%
B. we = 65.2% and wd = 34.8%
C. we = 66.7% and wd = 33.3%
D. we = 67.8% and wd = 32.2%
E. we = 72.4% and wd = 27.6%
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