Assumethat you have been hired as a consultant by CGT, a major producerof chemic
ID: 2661594 • Letter: A
Question
Assumethat you have been hired as a consultant by CGT, a major producerof chemicals and plastics, including plastic grocery bags,styrofoam cups, and fertilizers, to estimate the firm's weightedaverage cost of capital. The balance sheet and some otherinformation are provided below.
Assets
Currentassets
$38,000,000
Net plant,property, and equipment
$101,000,000
Totalassets
$139,000,000
Liabilities and Equity
Accountspayable
$10,000,000
Accruals
$9,000,000
Currentliabilities
$19,000,000
Long-termdebt (40,000 bonds, $1,000 par value)
$40,000,000
Totalliabilities
$59,000,000
Commonstock (10,000,000 shares)
$30,000,000
Retainedearnings
$50,000,000
Totalshareholders' equity
$80,000,000
Totalliabilities and shareholders' equity
$139,000,000
29.34%
23.47%
28.87%
25.11%
20.42%
Currentassets
$38,000,000
Net plant,property, and equipment
$101,000,000
Totalassets
$139,000,000
Explanation / Answer
CalcualtingDebt Weight (D/V): The Market Value of theFirm's Debt = 40,000 bonds *$1,150 = $46,000,000 Total Market Value ofthe Firm's Equity = 10,000,000 shares *$15 = $150,000,000 Total MarketCapitalization ( Equit + Debt) = $46,000,000 +$150,000,000 = $196,000,000 D/V = $46,000,000 / $196,000,000 = 0.23469 (or) 23.47% Debt Weight(D/V) = 23.47% CalcualtingDebt Weight (D/V): The Market Value of theFirm's Debt = 40,000 bonds *$1,150 = $46,000,000 Total Market Value ofthe Firm's Equity = 10,000,000 shares *$15 = $150,000,000 Total MarketCapitalization ( Equit + Debt) = $46,000,000 +$150,000,000 = $196,000,000 D/V = $46,000,000 / $196,000,000 = 0.23469 (or) 23.47% Debt Weight(D/V) = 23.47%Related Questions
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