Assume That You Have Been Hired as a Consultant by CGT

question 7

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%.
-What is the best estimate of the firm's WACC?

• A) 10.85%
• B) 11.19%
• C) 11.53%
• D) 11.88%
• E) 12.24%

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Definitions:

Structured

Organized in a clear, systematic way, often with a predefined format or plan.

Information Sharing

The exchange of data, information, or knowledge between individuals, organizations, or systems.

Social Communication

The process of sharing information, ideas, and feelings between people through interpersonal interaction and media.

Reactive

Responding to events or situations rather than initiating change proactively.