JKL Corp. needs to evaluate its capital investments with respect to the cost of capital. The following information is available: The corporate tax rate for JKL Corp. is 40%. The firm believes it is at its target capital structure of 30% long–term debt, 10% preferred stock, and 60%
common equity.
The current price of non–callable 12% coupon JKL bonds is $1153.72 with 15 years remaining till maturity. The firm’s perpetual preferred stock is priced at $116.95 paying 10% dividend on a quarterly basis. JKL’s common stock is currently trading at $50 per share. It recently paid $3.12 as dividend per share, which is expected to grow at a constant rate of 5.8%.
JKL’s beta is evaluated at 1.2, with yield on US Treasury bonds at 5.6% and a market risk premium of 6%. The CFO believes the market attributes a 3.2% risk premium on the firm’s borrowing yields.
4) What is JKL’s cost of equity using capital Asset Pricing Model (CAPM) as well as Dividend Growth Model and overall?
