Assumethat you have been hired as a consultant by CGT, a major producerof chemic
ID: 2661593 • Letter: A
Question
Assumethat you have been hired as a consultant by CGT, a major producerof chemicals and plastics, including plastic grocery bags,styrofoam cups, and fertilizers, to estimate the firm's weightedaverage cost of capital. The balance sheet and some otherinformation are provided below.
Assets
Currentassets
$38,000,000
Net plant,property, and equipment
$101,000,000
Totalassets
$139,000,000
Liabilities and Equity
Accountspayable
$10,000,000
Accruals
$9,000,000
Currentliabilities
$19,000,000
Long-termdebt (40,000 bonds, $1,000 par value)
$40,000,000
Totalliabilities
$59,000,000
Commonstock (10,000,000 shares)
$30,000,000
Retainedearnings
$50,000,000
Totalshareholders' equity
$80,000,000
Totalliabilities and shareholders' equity
$139,000,000
4.15%
4.47%
4.11%
3.57%
3.65%
Currentassets
$38,000,000
Net plant,property, and equipment
$101,000,000
Totalassets
$139,000,000
Explanation / Answer
20 years
?
20*2
Par Value of the Bond $1,000 Number of Years to Maturity20 years
Current Price of the Bond $1,150.00 Marginal Tax Rate 40% Coupon Rate(Semi-annual Coupon Payments) 7% Yield to Maturity (YTM)?
Calculating Yield toMaturity (YTM): (Using Ms-Excel "RATE"Function): Number of Periods(Nper)20*2
Coupon Payment (PMT) [$1,000 * 7.25/ 2%] -$36.25 Present Value of the Bond(PV) $1,150.00 Future Value (or) Par Value of theBond (FV) -$1,000 Yield to Matuiry(YTM) 2.978% Semi-AnnualYTM 2.978% Annual YTM (2.978 * 2) 5.956% Calculating After-TaxCost of Debt : After-Tax Cost ofDebt = 5.956% (1-0.40) = 0.05956 * 0.6 After-Tax Cost ofDebt = 0.0357 (or) 3.57% After-Tax Cost ofDebt = 3.57%Related Questions
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