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CGT Inc. hired you as a consultant to help estimate its cost of capital (WACC). You have been provided with the following data:
1. CGT currently has one type of bond outstanding. The bond is making semi-annual coupon payment. It has 20 years left until maturity and is carrying a 7.25% coupon rate. It currently has a yield-to-maturity of 8.57%. The bond has a book value of $40 million as indicated on the balance sheet.
2. A typical saving account at a bank is offering an interest rate of 1.5%, GIC is currently offering a return of 2.5% and a 25-year Government of Canada bond is currently yielding at 5.5%.
3. The beta of CGT's stock is 1.25 and the expected return of the market index such as TSX composite index is 11.5%.
4. There is currently 10 million shares of CGT stock trading publicly on the TSX stock exchange. CGT Inc. is expected to pay a dividend of $1.2 per share next year. The actual market price of CGT Inc. is considered undervalue because the actual return is 16% which is different than the expected return of the stock.
5. The tax rate associated with CGT Inc. is 40%.
Question a: What is the WACC of CGT Inc.?
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