Johnson Tire Distributors Has Debt with Both a Face and a Market

question 27

Multiple Choice

Johnson Tire Distributors has debt with both a face and a market value of $35,000. This debt has a coupon rate of 6.6 percent and pays interest annually. The expected earnings before interest and taxes are $8,300, the tax rate is 21 percent, and the unlevered cost of capital is 10.9 percent. What is the cost of equity?

• A) 12.46 percent
• B) 12.87 percent
• C) 14.56 percent
• D) 13.59 percent
• E) 15.14 percent

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Definitions:

Agricultural Revolution

Refers to significant changes in agricultural practices that resulted in increased crop production, historically marked by innovations like crop rotation, the plow, and the selective breeding of livestock.

Technological Advances

Progressive developments and innovations in technology that enhance efficiency, capabilities, and various aspects of life.

Ranching

The business of raising livestock, such as cattle or sheep, on large tracts of land.

Mining

The process or industry of extracting minerals, coal, or other geological materials from the earth, typically from an ore body, lode, vein, seam, or reef.