Problem: Suppose that you have been appointed as a consultant by CGT, a main producer of chemicals and plastics, comprising plastic grocery bags, Styrofoam cups and fertilizers, to estimation the firm's weighted average cost of capital. The balance sheet and some other detailed information are provided.
Liabilities and Equity:
The stock is currently selling for $15.00 per share, and it’s no callable $1,000 par value, 20-year, 7.25% bonds with semi-annual payments are selling for $1,150.00. The beta is 1.35, the yield on 6-month Treasury bill is 3.50%, and the yield on 20-year Treasury bond is 5.50%.
The required return on stock market is 11.50%, but the market has had average annual return of 14.50% throughout the past 5 years. The firm's tax rate is 40%.
problem1. What is best estimate of after-tax cost of debt?