Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a...

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Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month, Jake's paid an annual dividend in the amount of $1.593 per share. The dividend growth rate is 4%. Jake's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7% coupon, pay interest annually, and mature in 4.89 years. The bonds are selling at 99% of face value. The company's tax rate is 34%. What is Jake's weighted average cost of capital?

David · Accepted Answer

Cost of equity computation 
In order to find out the cost of equity, we would use the Gordon Dividend Discount Model. As per this 
model, 
Current price of stock = Next year dividend /(Cost of Equity – Growth rate of dividends) 
Current price of stock = $ 36, Next year dividend = 1.593*1.04 = $1.6567, Dividend growth rate = 4% 
Thus,  36 = 1.6567/(Cost of equity -0.04) 
Solving the above, cost of equity = 8.

Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month, Jake's paid an annual dividend in the amount of $1.593 per share. The dividend growth...

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