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.
What is JKL’s cost of equity using capital Asset Pricing Model (CAPM) as well as Dividend Growth Model and overall?
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