Problem:
Johnson Tire Distributors has an unlevered cost of capital of 10 percent, a tax rate of 34 percent, and expected earnings before interest and taxes of $1,600 in perpetuity. The company has $2,900 in bonds outstanding that have an 8 percent coupon and pay interest annually in perpetuity. The bonds are selling at par value.
Required:
What is the cost of equity?
Note: Explain all calculation and formulas.