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Author Question: The following data apply to problems 7578 below.You are employed by GCUT, a Fortune 500 firm that is ... (Read 35 times)

zl00505

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The following data apply to problems 75–78 below.

You are employed by GCUT, 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 GCUT 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 GCUT stock is currently selling for $8.20 per share and that GCUT bonds are selling for $910 per bond. The bonds have a $1,000 par value, an 8.5% annual coupon rate, semiannual payments, are not callable, and have a 22-year maturity. GCUT’s beta is 1.3, the yield on a 6-month Treasury bill is 3.9%, and the yield on a 20-year Treasury bond is 6%. The expected return on the stock market is 12.6%, but the market has had an average annual return of 15.1% during the past 5 years. GCUT is in the 40% tax bracket.


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

5.14%


5.69%


5.82%


6.13%



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Marked as best answer by zl00505 on Aug 7, 2023

Kevin5!

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zl00505

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Reply 2 on: Aug 7, 2023
Great answer, keep it coming :)


carlsona147

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Reply 3 on: Yesterday
Excellent

 

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