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.
Assets
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Liabilities and Equity
The stock is currently selling for $15.25 per share,and its noncallable $1,000.00 par value,20-year,9.00% bonds with semiannual payments are selling for $930.41.The beta is 1.22,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 25%.

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

• A) 11.41%
• B) 11.92%
• C) 12.44%
• D) 12.82%
• E) 13.33%

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Definitions:

Utility Function

A mathematical representation that describes how the total utility of a consumer depends on the consumption of various goods and services.

Budget Line

A visual depiction of every potential pair of two products a consumer is able to buy based on their earnings and the costs of these items.

Utility Function

A mathematical representation of how different quantities of goods or services translate into levels of happiness or satisfaction for an individual or society.

Utility Function

A mathematical representation that assigns a value to every possible choice to indicate the level of satisfaction or utility that choice provides to a consumer.