Problem:
Jack's Construction Co. has 80,000 bonds outstanding that are selling at par value. The bonds yield 8.5 percent. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 3 percent and the market risk premium is 6 percent. Jack's tax rate is 34 percent.
Required:
Question: What is Jack's weighted average cost of capital?
- 5.28 percent
- 8.54 percent
- 9.26 percent
- 8.27 percent
- 4.99 percent
Note: Provide support for rationale.