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 Net, plant, property, and equipment Total assets Liabilities and Equity Accounts payable Accruals $ $ $ $ SS $ 38,000,000 101,000,000 139,000,000 10,000,000 9,000,000 19,000,000 Current Liabilities $ Long-term debt (40,000 bonds, $1,000 par valu $ Total liabilities $ Common stock (10,000,000 shares) $ Retained earnings $ 50,000,000 Total shareholders equity $ 80,000,000 Total liabilities and shareholder's equity $ 139,000,000 1. What is the best estimate of the tax cost of debt? 2. CAPM 3. WACC 40,000,000 59,000,000 30,000,000 The Stock is currently selling $15.25 per share, and its noncallable $1000 par value, 20 year, 7.25% bonds semiannual payments are selling for $875. The 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 required return on the stock market is 11.50% but the market had an average annual return of 14.50% during the past 5 years. The firms tax rate is 40%.
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 Net, plant, property, and equipment Total assets Liabilities and Equity Accounts payable Accruals $ $ $ $ SS $ 38,000,000 101,000,000 139,000,000 10,000,000 9,000,000 19,000,000 Current Liabilities $ Long-term debt (40,000 bonds, $1,000 par valu $ Total liabilities $ Common stock (10,000,000 shares) $ Retained earnings $ 50,000,000 Total shareholders equity $ 80,000,000 Total liabilities and shareholder's equity $ 139,000,000 1. What is the best estimate of the tax cost of debt? 2. CAPM 3. WACC 40,000,000 59,000,000 30,000,000 The Stock is currently selling $15.25 per share, and its noncallable $1000 par value, 20 year, 7.25% bonds semiannual payments are selling for $875. The 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 required return on the stock market is 11.50% but the market had an average annual return of 14.50% during the past 5 years. The firms tax rate is 40%.
Chapter9: Responsibility Accounting And Decentralization
Section: Chapter Questions
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Transcribed Image Text: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
Net, plant, property, and equipment
Total assets
$
$
$
Liabilities and Equity
Accounts payable
Accruals
Current Liabilities
Long-term debt (40,000 bonds, $1,000 par valu $
Total liabilities
$
Common stock (10,000,000 shares)
$
Retained earnings
Total shareholders equity
Total liabilities and shareholder's equity
$
$
$
$
$
$
38,000,000
101,000,000
139,000,000
10,000,000
9,000,000
19,000,000
40,000,000
59,000,000
30,000,000
50,000,000
80,000,000
139,000,000
The Stock is currently selling $15.25 per share, and its noncallable $1000 par value, 20 year, 7.25% bonds
semiannual payments are selling for $875. The 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 required return on the stock market is 11.50% but
the market had an average annual return of 14.50% during the past 5 years. The firms tax rate is 40%.
1. What is the best estimate of the tax cost of debt?
2. CAPM
3. WACC
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