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Johnson Tire Distributors has an unlevered cost of capital of 13 percent, a tax rate of...

Johnson Tire Distributors has an unlevered cost of capital of 13 percent, a tax rate of 33 percent, and expected earnings before interest and taxes of $1,400. The company has $2,500 in bonds outstanding that have a 6 percent coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity?

12.09 percent

10.58 percent

9.07 percent

13.60 percent

15.12 percent

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Answer #1

Value of equity before capitalisation = $7,215.38 (1400*0.67)/0.13 Value of firm with debt = $8,040.38 7215.38+(2500*0.33) Af

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