Question 22 1 pts Jake the Dog Inc. is investing in a new portable iguana killin

Question

Question 22 1 pts Jake the Dog Inc. is investing in a new portable iguana killing machine that will cost $200,000. The machine has a useful life of 6 years and falls into the 5-year property class for the depreciation purposes. The IRS MACRS schedule for the six years is: (1) 20%, (2) 32%, (3) 19.2%, (4) 11.52%, (5) 11.52%, (6) 5.76%. It will generate $50,000 per year of savings for Jake and can be sold for $50,000 at the end of the 6-year period. Jake's corporate tax rate is 34%. In addition, Jake has 2000 outstanding 9% annual coupon bonds with a $1000 par value, 20 years to maturity and a price of $1085. Jake also has 60,000 shares of common stock outstanding that is selling for $45 per share. This stock has a beta of 2.45 (its Jake! he is a risky dog-dude!!), the|expected market return is 12% and the risk- free rate is 5%. Finally, Jake has 36,000 shares preferred stock outstanding that pays a 5.5% dividend and sells for $40 per share. What is the cost of equity capital? ? 18.15% ? 19.15% ? 20.15% ? 21.15% 022.15%

Explanation / Answer

Cost of equity capital as per CAPM = Risk free rate + Beta*(Expected return - risk free rate) = 5 + 2.45*(12-5) = 22.15%

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