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

question 52

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%.
-Based on the CAPM, what is the firm's cost of equity?

• A) 11.15%
• B) 11.73%
• C) 12.35%
• D) 13.00%
• E) 13.65%

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Definitions:

Title Warranties

Legal guarantees provided by a seller to a buyer that they possess a clear and unencumbered title to the property or goods being sold.

Disclaim or Modify

To reject, deny responsibility, or change terms and conditions in an agreement or statement.

Transferring Rights

The act of moving or assigning legal rights or interests from one party to another.

Merchantable

A standard in sales law indicating that goods are fit for the ordinary purposes for which such goods are used.