Question 23 1 pts Jake t $200,000. The machine has a useful life of 6 years and

Question

Question 23 1 pts Jake t $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) 11.5296, (6) 5.76%. It will generate $50,000 per year of he Dog Inc. is investing in a new portable iguana killing machine that will cost 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, 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 preferred capital? ,000 ? 13.25% ? 13.75% ? 9.25% ? 12.75% Ae 14.75%

Explanation / Answer

Answer:

Cost of Preferred Stock = Annual Dividend / Current Market Price * 100
Annual Dividend = $100 * 5.5%
Annual Dividend = $5.5

Current Market Price = $40

Cost of Preferred Stock = 5.5 / 40 * 100
Cost of Preferred Stock = 13.75%

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