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$38,000,000Net plant, property, and equipment$101,000,000Total assets$139,000,000? Liabilities and Equity Accounts payable$10,000,000Accruals$9,000,000Current liabilities$19,000,000Long-term debt (40,000 bonds, $1,000 par value)$40,000,000Total liabilities$59,000,000Common stock (10,000,000 shares)$30,000,000Retained earnings$50,000,000Total shareholders' equity$80,000,000Total liabilities and shareholders' equity$139,000,000The 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. Based on the CAPM, what is the firm's cost of equity?
A. 11.78%
B. 12.18%
C. 12.84%
D. 13.24%
E. 13.50%
Answer: D
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