Assume That You Have Been Hired as a Consultant by CGT

question 66

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

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

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Definitions:

Separate Dichotomies

A concept involving the division of aspects into two completely opposite groups or categories.

TAT

Stands for Thematic Apperception Test, a projective psychological test that assesses a person's patterns of thought, attitudes, observational capacity, and emotional responses to ambiguous test materials.

16PF

A repetitive query; A psychological assessment tool evaluating personality traits based on sixteen distinct factors, offering insights into an individual's behavior patterns.