Problem:

Johnson Tire Distributors has an unlevered cost of capital of 11 percent, a tax rate of 34 percent, and expected earnings before interest and taxes of $1,800. The company has $3,200 in bonds outstanding that have a 6 percent coupon and pay interest annually. The bonds are selling at par value.

Task:

Question: What is the cost of equity?

• 8.55 percent
• 9.77 percent
• 10.99 percent
• 7.33 percent
• 12.22 percent

Note: Please explain comprehensively and give step by step solution.