Qu 1: 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. The company has $2,800 in bonds outstanding that have a 7 percent coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity?
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Jemisen’s firm has expected earnings before interest and taxes of $1,800. Its unlevered cost of capital is 14 percent and its tax rate is 34 percent. The firm has debt with both a book and a face value of $2,700. This debt has a 7 percent coupon and pays interest annually. What is the firm’s weighted average cost of capital?
Central Systems, Inc. desires a weighted average cost of capital of 6 percent. The firm has an after-tax cost of debt of 4 percent and a cost of equity of 8 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?
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