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What is the best estimate of the after-tax cost of debt for CGT?

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  • Post Date 2018-11-10T07:19:44+00:00
  • Post Category Research Paper Queries

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What is the best estimate of the after-tax cost of debt for CGT?

FINC 610

Case Study (10 marks)- Cost of Capital (individual work)

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

 

$ 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

 

 

 

 

 

 

 

 

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.


  1. What is the best estimate of the after-tax cost of debt for CGT?
  1. Using the CAPM approach, what is the best estimate of the cost of equity for CGT?
  1. What is the best estimate of the WACC for CGT?

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