You are employed by CGT - Total liabilities and...

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You are employed by CGT, a Fortune 500 firm that is a major producer of chemicals and  plastics,   including   plastic   grocery   bags,   styrofoam   cups,   and   fertilizers.     You   are   on   the  corporate staff as an assistant to the CFO.   This is a position with high visibility and the  opportunity for rapid advancement, providing you make the right decisions.   Your boss has  asked you to estimate the weighted average cost of capital for the company.  The balance sheet  and some other information about CGT follows below. Assets Current assets Net plant, property, and equipment Total assets Liabilities and equity Accounts payable Accruals Current liabilities Long term debt (40,000 bonds, $1,000 par value) Total liabilities Common stock (10,000,000 shares) Retained earnings Total shareholders equity
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Unformatted text preview: Total liabilities and shareholders equity You check The Wall Street Journal and see that CGT stock is currently selling for $7.50 per share and that CGT bonds are selling for $875.00 per bond. The bonds have a S1,000 par value, a 7.25% annual coupon rate, semiannual payments, are not callable, and a 20-year maturity. CGT's 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 expected 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. CGT is in the 40% tax bracket. Calculate the company’s WACC. w d 31.8% r d (1 – T) 5.14% w c 68.2% r s 13.00% WACC = w d (r d )(1 – T) + w c (r s ) = 10.50%...
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