Problem:
Debt: Jones Industries borrows $600,000 for 10 years with an annual payment of $100,000.
Question 1) What is the expected interest rate (cost of debt)?
Internal common stock: Jones Industries has a beta of 1.39. The risk-free rate as measured by the rate on short-term US Treasury bill is 3 percent, and the expected return on the overall market is 12 percent.
Question 2) Determine the expected rate of return on Jones's stock (cost of equity). Here are the details:
|
Jones Total Assets
|
$2,000,000
|
|
Long- & short-term debt
|
$600,000
|
|
Common internal stock equity
|
$400,000
|
|
New common stock equity
|
$1,000,000
|
|
Total liabilities & equity
|
$2,000,000
|
Solve the given numerical problem and illustrate step by step calculation.