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Estimate Jake cost of capital

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Reference no: EM132896893

Question - Jake's Sound Systems (JSS) has 210,000 shares of common stock outstanding at a market price of $36 a share. JSS 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 5 years. The bonds are selling at 99% of face value. JSS has a beta of 1.4 and a marginal tax rate of 34%.

Required -

1) Estimate Jake's cost of capital, WACC. Note: The treasury bond rate is 2.1% & the market risk premium is 5.8%.

2) If inflation rate were to increase, explain what impact that would have on the WACC you just calculated.

Reference no: EM132896893

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