Exhibit 10 ​
Liabilities and Equity The Stock Is Currently Selling for $17

question 19

Multiple Choice

Exhibit 10.1
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 $\begin{array}{lr}\text { Current assets } & \$ 38,000,000 \\\text { Net plant, property, and equipment } & \$ 101,000,000 \\\text { Total assets } & \$ 139,000,000\end{array}$ ​
Liabilities and Equity $\begin{array}{lr}\text { Accounts payable } & \$ 10,000,000 \\\text { Accruals } & \$ 9,000,000 \\\text { Current liabilities } & \$ 19,000,000 \\\text { Long-term debt ( } 40,000 \text { bonds, } \$ 1,000 \text { par value) } & \$ 40,000,000 \\\text { Total liabilities } & \$ 59,000,000 \\\text { Common stock ( } 10,000,000 \text { shares) } & \$ 30,000,000 \\\text { Retained earnings } & \$ 50,000,000 \\\text { Total shareholders' equity } & \$ 80,000,000 \\\text { Total liabilities and sharehol ders' equity } & \$ 139,000,000 \\\hline\end{array}$ The stock is currently selling for $17.75 per share,and its noncallable $3,319.97 par value,20-year,1.70% bonds with semiannual payments are selling for $881.00.The beta is 1.29,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%.
-Refer to Exhibit 10.1.What is the best estimate of the after-tax cost of debt?

• A) 5.62%
• B) 6.07%
• C) 6.39%
• D) 6.77%
• E) 7.11%

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Definitions:

Carrying Value

The book value of assets and liabilities on a company's balance sheet, calculated as the original cost minus any depreciation, amortization, or impairment costs.

Equity Accounts

Equity accounts represent the owner's value in a business, reflected through transactions like contributed capital and retained earnings.

Sinking Fund Bonds

Bonds that include a provision requiring the issuer to set aside funds regularly to repay the bond at maturity.

Principal

The primary amount of a loan or investment, excluding interest or profits.