(The Following Information Applies to Problems 91, 92, 93, and 94.)

question 24

Multiple Choice

(The following information applies to Problems 91, 92, 93, and 94.)
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.
The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. 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 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?

• A) 8.67%
• B) 19.60%
• C) 20.58%
• D) 21.61%
• E) 22.69%

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Definitions:

Identity Versus Role Confusion

Erikson’s fifth stage of psychosocial development, where adolescents face the challenge of developing a clear sense of self or risk remaining confused about their identity.

Jung

Carl Jung, a Swiss psychiatrist and psychoanalyst who founded analytical psychology, known for his concepts of the collective unconscious, archetypes, and individuation.

God Archetype

In Jungian psychology, a representation of the universal symbols or motifs that arise from the collective unconscious, embodying aspects of authority, power, and protection.

Erik Erikson

A developmental psychologist known for his theory on the psychosocial development of human beings.