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natalie2sheffield
natalie2sheffield
05.09.2020 • 
Business

Exhibit 10-1 (The following data apply to the problem(s) below.) 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 $ 38,000,000 Net plant, property, and equipment 101,000,000 Total assets $139,000,000 Liabilities and equity Accounts payable $ 10,000,000 Accruals 9,000,000 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 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 S1,000 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 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. CGT is in the 40% tax bracket. __c__ 19. Refer to Exhibit 10-1. What is the best estimate of the after-tax cost of debt for CGT? a. 4.64% b. 4.88% c. 5.14% d. 5.40% e. 5.67% __a__ 20. Refer to Exhibit 10-1. Using the CAPM approach, what is the best estimate of the cost of equity for CGT? a. 13.00% b. 13.52% c. 14.06% d. 14.62% e. 15.21% __a__ 21. Refer to Exhibit 10-1. Which of the following is the best estimate for the weights to be used when calculating the WACC? a. wc = 68.2%; wd = 31.8% b. wc = 69.9%; wd = 30.1% c. wc = 71.6%; wd = 28.4% d. wc = 73.4%; wd = 26.6% e. wc = 75.3%; wd = 24.7% __c__ 22. Refer to Exhibit 10-1. What is the best estimate of the WACC for CGT? a. 9.88% b. 10.18% c. 10.50% d. 10.81% e. 11.14%

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