Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery ba
gs, styrofoam cups, and fertilizers, to estimate the firm's weighted average cost of capital. CGT's balance sheet data are as follows.
The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, 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%. Determine the best estimate of the after-tax cost of debt. 
Assets 2018 
Current assets $38,000,000
Net plant, property, and equipment $101,000,000 
Total assets $139,000,000 
Liabilities & Equity 
Accounts payable $10,000,000 
Accruals $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
a. 5.40%.
b. 5.67%.
c. 4.64%.
d. 5.14%.