Johnson Tire Distributors has debt with both a face and a market value of $12,000. This debt has a coupon rate of 6 percent

Johnson Tire Distributors has debt with both a face and a market value of $12,000. This debt has a coupon rate of 6 percent and pays interest annually. The expected earnings before interest and taxes are $2,100, the tax rate is 30 percent, and the unlevered cost of capital is 11.7 percent. What is the firm's cost of equity?    A.  22.46 percent B.  22.87 percent C.  23.20 percent D.  23.59 percent E.  25.14 percent VU = [$2,100 × (1 - 0.30)]/0.117 = $12,564.10 VL = $12,564.10 + (0.30 × $12,000) = $16,164.10 VE = $16,164.10 - $12,000 = $4,164.10 RE = 0.117 + [(0.117 - 0.06) × ($12,000/$4,164.10) × (1 - 0.30)] = 23.20 percent

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Country Markets has an unlevered cost of capital of 12 percent, a tax rate of 38 percent, and expected earnings before interest and taxes of $15,700. The company has $12,000 in bonds outstanding that have a 6 percent coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity?    A.  12.61 percent B.  13.36 percent C.  13.64 percent D.  14.07 percent E.  14.29 percent VU = [$15,700 × (1 - 0.38)]/0.12 = $81,116.67 VL = $81,116.67 + (0.38 × $12,000) = $85,676.67 VE = $85,676.67 - $12,000 = $73,676.67 RE = 0.12 + [(0.12 - 0.06) × ($12,000/$73,676.67) × (1 - 0.38)] = 12.61 percent