Johnson Tire Distributors has an unlevered cost of capital of 10 percent, a tax rate of...
Johnson Tire Distributors has an unlevered cost of capital of 10 percent, a tax rate of 34 percent, and expected earnings before interest and taxes of $1,700. The company has $3,200 in bonds outstanding that have an 8 percent coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity? 8.37 percent 7.32 percent 9.42 percent 10.46 percent 6.28 percent
Homework Answers
D. 10.46 percent
VU = [$1,700 x (1 - 0.34)] / 0.10 = $11,220
VL = $11,220 + (0.34 x $3,200) = $12,308
VE = $12,308 - $3,200 = $9,108
RE = 0.10 + [(0.10 - 0.08) x ($3,200/$9,108) x (1 - 0.34)] = 10.46 percent
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