Assume That You Have Been Hired as a Consultant by CGT

question 5

Multiple Choice

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%.
-What is the best estimate of the after-tax cost of debt?

• A) 4.64%
• B) 4.88%
• C) 5.14%
• D) 5.40%
• E) 5.67%

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Definitions:

Authorized Shares

Authorized shares refer to the maximum number of shares a corporation is legally allowed to issue, as specified in its articles of incorporation.

Redemption Value

The value at which a bond or other debt instrument can be redeemed before maturity, typically at face value.

Dividends in Arrears

These are dividends on cumulative preferred stock that have not been paid in the period they were due, accumulating until they are paid out.

Preferred Shares

Preferred shares are a type of stock that provides a fixed dividend, taking precedence over common stock in the distribution of dividends and assets upon the company's liquidation.