What is the cost of capital for Jeritu

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Question - Jeritu has the following capital structure. It has two classes of common stock. Class A voting shares have a market value of $600 million and a beta of 1.20, while Class B non-voting shares have a market value of $400 million. There are 40 million Class B shares, each share is expected to pay a dividend of $0.70 next year, and these dividends are expected to grow at a rate of 4% per year for the foreseeable future.

There are also two series of bonds, series Y and series Z.  There are a million bonds of each type of bond. Series Y bonds have a zero coupon rate, mature in ten years, and are selling for $650 per bond. Series Z bonds also mature in 10 years, have a coupon rate of 8%, and are yielding 5%. Assume that coupons are paid semi-annually.

The expected market risk premium is 6% and the risk-free rate is 3%. The company faces a tax rate of 20%. What is the cost of capital for Jeritu?

Reference no: EM132929926

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