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Financial Planning Problems




Question;Multiple;Choice: Problems;(The following information applies to the next four;problems. Financial calculator;required.);You are employed by CGT, a Fortune 500 firm that is a major;producer of chemicals and plastic goods;plastic grocery bags, styrofoam cups, and fertilizers. You are on the corporate staff as an;assistant to the Vice-President of Finance.;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. Following are balance sheets and some;information about CGT.;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 face 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 CGT stock;is currently selling for $7.50 per share and that CGT bonds are selling for;$889.50 per bond. These bonds have a;7.25 percent annual coupon rate, with semi-annual payments. The bonds mature in twenty years. The beta for your company is approximately;equal to 1.1. The yield on a 6-month;Treasury bill is 3.5 percent and the yield on a 20-year Treasury bond is 5.5;percent. The expected return on the;stock market is 11.5 percent, but the stock market has had an average annual;return of 14.5 percent during the past five years. CGT is in the 40 percent tax bracket.;[1]. Using;the CAPM approach, what is the best estimate of the cost of equity for CGT?;a. 10.10%;b. 12.10%;c. 12.30%;d. 15.40%;e. 15.60%;[2]. What is best estimate for the after-tax cost;of debt for CGT?;a. 2.52%;b. 4.20%;c. 4.35%;d. 5.04%;e. 5.37%;[3]. Which of the following is the best estimate;for the weights to be used when calculating the WACCC?;a. we = 57.6% and wd = 42.4%;b. we = 65.2% and wd = 34.8%;c. we = 66.7% and wd = 33.3%;d. we = 67.8% and wd = 32.2%;e. we = 72.4% and wd = 27.6%;[4]. What is the best estimate of the WACC for;CGT?;a. 8.65%;b. 8.92%;c. 9.18%;d. 9.75%;e. 9.83%;[5]. Hamilton;Company's 8 percent coupon rate, quarterly payment, $1,000 par value bond;which matures in 20 years, currently sells at a price of $686.86. The company's tax rate is 40 percent. Based on the nominal interest rate, not the;EAR, what is the firm's component cost of debt for purposes of calculating the;WACC?;a.;3.05%;b.;7.32%;c.;7.36%;d. 12.20%;e. 12.26%;[6]. A;stock analyst has obtained the following information about J-Mart, a large;retail chain;(1) The company has noncallable bonds with;20 years maturity remaining and a maturity value of $1,000. The bonds have a 12 percent annual coupon and;currently sell at a price of $1,273.8564.;(2) Over;the past four years, the returns on the market and on J-Mart were as follows;Year Market J-Mart;2001;12.0% 14.5%;2002;17.2 22.2;2003;-3.8 -7.5;2004;20.0 24.0;(3) The;current risk-free rate is 6.35 percent, and the expected return on the market;is 11.35 percent. The company's tax rate;is 35 percent.;The company anticipates that its proposed;investment projects will be financed with 70 percent debt and 30 percent;equity. What is the company's estimated;weighted average cost of capital (WACC)?;a.;8.04%;b.;9.00%;c. 10.25%;d. 12.33%;e. 13.14%;CHAPTER 9.


Paper#50978 | Written in 18-Jul-2015

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