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

question 28

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.Which of the following is the best estimate for the weight of debt for use in calculating the WACC? Do not round your intermediate calculations.

• A) 16.56%
• B) 17.23%
• C) 17.57%
• D) 17.92%
• E) 18.64%

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Definitions:

Capital Market Line

A line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the risk (measured by standard deviation).

Capital Allocation Line

A graphical representation that shows risk and return of possible portfolios by combining a risk-free asset with a portfolio of risky assets.

Passive Investment Strategy

A strategy in investing that involves minimal buying and selling actions, typically focused on long-term investment in indexes or funds that mirror market performance.

Complete Portfolio

A diversified collection of investment assets that covers a wide range of asset classes and investment vehicles, aiming to reduce risk through diversification.