Author Question: The following data apply to problems 7578 below.You are employed by GCUT, a Fortune 500 firm that is ... (Read 43 times)

allywil32 · **on:** Aug 7, 2023

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.

Using the CAPM approach, what is the best estimate of the cost of equity for GCUT?

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13.00%

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13.62%

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14.06%

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14.58%

Karla347 · **Reply #1 on:** Aug 7, 2023

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