Johnson tire distributors has an unlevered cost of capital, Ask an Expert

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Johnson Tire Distributors has an unlevered cost of capital of 12 percent, a tax rate of 34 percent, and expected earnings before interest and taxes of $1,400 in perpetuity. The company has $2,500 in bonds outstanding that have a 7 percent coupon and pay interest annually in perpetuity. The bonds are selling at par value. What is the cost of equity?

HINT: First get the value of the unlevered firm. Then get the value of the levered firm. Next, get the debt-equity ratio so you can find out the cost of equity. Here you need both M&M propositions.

Answer options:

13.36 percent

8.02 percent

10.69 percent

12.03 percent

9.35 percent

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M951606

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