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Exhibit 10.1 Assume that you have been hired as a consultant by CGT, a major producer...

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 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. Which of the following is the best estimate for the weight of debt for use in calculating the WACC? Do not round your intermediate calculations.

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Answer #1

Current selling price of common share = $17.75 per share

Number of outstanding share = 10000000

Number of Bond (Outstanding) = 40000

Price of Bond (Outstanding) = $881

Total Value of Equity = Market price per share*Outstanding Shares

Total Value of Equity = $17.75 * 10,000,000 shares

Total Value of Equity = $177500000

Total value of debt = Number of Outstanding bond * Price per bond

Total value of debt = 40,000 * $881

Total value of debt = $35240000

So,

Total Value of firm = Total value of Equity + Total Value of debt

Total Value of firm = $ $177500000  +  $35240000

Total Value of firm =  $212740000

Weight of debt = Total value of debt / Total Value of firm

Weight of debt = $35240000 / $212740000

Weight of debt = 0.1656 or 16.56%

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