CGT Finance Assingment Help With Solution

Posted on March 31, 2017

CGT Finance Assingment Help With Solution

 

1. You are employed by CGT, 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 CGT are given 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
Notes payable  [figure is not a typo]

Accruals

                               000

   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 CGT stock is currently selling for $7.50 per share and that CGT bonds are selling for $845.00 per bond.  The bonds have a $1,000 par value, a 7.15% annual coupon rate with semi-annual payments, are not callable, are rated AAA with negligible risk of default, and have a 20-year maturity.  CGT’s Beta is 1.35, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%.  The expected return on the stock market is 13.50%, but the market has had an average annual return of 10.50% during the past 5 years.  CGT has a marginal effective tax rate of 40%.                                           [Show all answers to 2 decimal places.]

  1. What is the best estimate of the nominal annual pre-tax cost of debt for CGT?

 

 

  1. Using the CAPM approach, what is the best estimate of the cost of equity for CGT?

 

 

  1. What are the appropriate weights for equity and debt to be used when calculating the WACC?

 

 

  1. What is your estimate of the WACC?

 

 

  1. Suppose Asset A has an expected return of 10 percent and a Beta of 1.20.

Asset B has an expected return of 16 percent and a Beta of 0.95.

Portfolio P is formed consisting of 40% of Asset A and 60% of Asset B.

If the risk-free return rRF is 3% and the market risk premium RPM is 8%, what are the portfolio’s (a) expected return, (b) Beta, and (c) required return? Show 2 decimal places.

 

(d) Without performing any numerical calculations, do you expect the risk of the portfolio to be (i) greater than both assets A and B or (ii) less than at least either A or B (or even possibly both)?  Explain the significance of your response of either (i) or (ii) to portfolio theory without resorting to any numerical computation.

 

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  1. The Zumwalt Company is paying a dividend of $2.23 per share in Year 0, and that dividend is expected to grow at a constant rate of 5.55% per year in the future.  The company’s Beta is 1.25, the market risk premium RPM is 6.50%, and the risk-free rate rRF is 4.20%.  What is the company’s estimated current stock price (in Year 0), in dollars and cents? (Hints: Be careful to distinguish between Year 0 and the subsequent year, and round only the final answer to dollars and cents – two decimal places.)

 

4.      In 2014, K Corp. had the following income statement (in millions of dollars):

 
    
Sales  $2,000
Costs  1,200
Depreciation    150
EBIT  $  650
Interest expense    210
EBT  $  440
Taxes    165
Net income $  275

a.      How much net operating profit after taxes (NOPAT) did the firm have in 2014?

 

b.      In order to sustain its operations and thus generate sales and cash flows in the future, K Corp. was required in 2014 to make $375 million of capital expenditures on new gross fixed assets and to invest an additional $155 million in net operating working capital.  What was K Corp’s 2014 free cash flow (FCF) (to the nearest dollar

 

5. Company A’s optimal capital structure is 30% debt, 60% common equity, and 10% preferred, but its current debt ratio is 55%.  The firm’s Beta is 0.85, with a corporate tax rate of 40%.  The bonds have $1,000 par (or face) value, 4.25% annual coupon rate, semi-annual payments, a 20-year maturity, and are selling for $1070.00.  Company A has no notes payable. The preferred dividend per share of company A is $0.85 and its current price is $8.25.  External estimates: twenty-year Treasury bonds are yielding 5.3%, two-year Treasury notes are yielding 3.5%, the historical average market return over the past 10 years was 10.5%, and the expected average market return is 11.5%.

a. Explain in words (in at most two sentences) whether you expect the current external interest rate for 20-year semi-annual interest-payment bonds for companies with Company A’s risk to be less than, equal to, or greater than the coupon rate associated with A’s bond.

 

b. Calculate Firm A’s pre-tax cost of debt to the nearest hundredth (2 decimal places).     

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