Exhibit 10.1 Assume That You Have Been Hired as a Consultant by Consultant

question 88

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.
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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%.
-Refer to Exhibit 10.1.Based on the CAPM,what is the firm's cost of equity?

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

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Definitions:

Personality Category

A classification used to describe and group individuals based on common personality traits or characteristics.

Classification

The systematic process of organizing and categorizing entities based on shared characteristics or principles.

Cardinal Trait

A characteristic or feature that is so dominant in an individual's personality that it influences nearly all of their actions and attitudes.

Dominates

To have a commanding influence on; exercise control over.