Johnson Tire Distributors: An Unlevered Cost Of Capital

1.

Bob's Warehouse has a pre-tax cost of debt of 8.4 percent and an unlevered cost of capital of 14.6 percent. The firm's tax rate is 37 percent and the cost of equity is 18 percent. What is the firm's debt-equity ratio?

| 0.76 | | 0.82 | | 0.79 | | 0.87 | | 0.72 |

2.

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 $1,400. The company has $2,700 in bonds outstanding that have an 8 percent coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity?

| 8.27 percent | | 11.81 percent | | 9.45 percent | | 10.63 percent | | 7.08 percent |
3.
Jemisen's firm has expected earnings before interest and taxes of $1,900.
Its unlevered cost of capital is 12 percent and its tax rate is 33 percent. The firm has debt with both a book and a face value of $3,200. This debt has an 8 percent coupon and pays interest annually. What is the firm's weighted average cost of capital?

| 11.82 percent | | 10.97 percent | | 11.14 percent | | 11.44 percent | | 10.91 percent |
4.

L.A. Clothing has expected earnings before interest and taxes of $2,000, an unlevered cost of capital of 11 percent and a tax rate of 34 percent. The company also has $2,900 of debt that carries a 7 percent coupon. The debt is selling at par value. What is the value of this firm?

| $16,881.80 | | $11,687.40 | | $12,986.00 | | $14,284.60 | | $15,583.20 |
5.

Kelso Electric is debating between a leveraged and an unleveraged capital structure. The all equity capital structure would consist of 27,000 shares of stock. The debt and equity option would consist of 15,000 shares of stock plus $250,000 of debt with an interest rate of 6 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore
taxes.

| $18,225.00 | | $20,250.00 | | $33,750.00 | | $14,175.00 | | $16,200.00 |