View the step-by-step solution to:


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.


Current assets $38,000,000

Net plant, property, and equipment $101,000,000

Total assets $139,000,000

 Liabilities and Equity

Accounts payable $10,000,000

Accruals $9,000,000

Current liabilities $19,000,000

Long-term debt (40,000 bonds, $1,000 par value) $40,000,000

Total liabilities $59,000,000

Common stock (10,000,000 shares) $30,000,000

Retained earnings $50,000,000

Total shareholders' equity $80,000,000

Total liabilities and shareholders' equity $139,000,000

The stock is currently selling for $17.75 per share, and its noncallable $3,319.97 par value, 20-year, 1.70% bonds with semiannual payments are selling for $881.00. The beta is 1.29, 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?






Top Answer

Cost of Equity = R Risk-Free + Beta x (R... View the full answer

Sign up to view the full answer

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question