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.