Jack’s Construction Co. has 80,000 bonds outstanding that are selling

Jack’s Construction Co. has 80,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 8.5 percent. The company also has 4 million shares of common stock outstanding.

The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 4 percent and the market risk premium is 8 percent. Jack’s tax rate is 35 percent. What is Jack’s weighted average cost of capital?
A) 7.10 percent
B) 7.39 percent
C) 10.38 percent
D) 10.65 percent
E) 11.37 percent

ANSWER

C