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
| 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
|
|
|
The stock is currently selling for $15.00 per share, and its
noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual
payments are selling for $1,150.00. The beta is 1.35, the yield on
a 6-month Treasury bill is 3.50%, and the yield on a 20-year
Treasury bond is 5.50%. The required 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. The firm's tax rate is 40%. Which of the
following is the best estimate for the weight of debt for use in
calculating the WACC?
dr.two
