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

question 52

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

• A) 11.78%
• B) 12.18%
• C) 12.84%
• D) 13.24%
• E) 13.50%

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Definitions:

Corporation Income Tax

A tax imposed on the net income of a corporation, calculated based on the company's profit.

Capital Flow

The movement of money for the purpose of investment, trade, or business production, either within a country or internationally.

Tax Shifting

The transfer of the burden of a tax from the entity legally responsible for paying it to another party, often consumers, through higher prices.

Tax Evasion

The illegal practice of not paying taxes by not reporting income, reporting expenses not legally allowed, or by not paying taxes owed.