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QUESTION

Cost and Debt Equity

1.Debt: Jones Industries borrows $600,000 for 10 years with an annual payment of $100,000. What is the expected interest rate (cost of debt)?

2.Internal common stock: Jones Industries has a beta of 1.39. The risk-free rate as measured by the rate on short-term US Treasury bill is 3 percent, and the expected return on the overall market is 12 percent. Determine the expected rate of return on Jones’s stock (cost of equity). Here are the details:

Jones Total Assets $2,000,000

Long- & short-term debt $600,000

Common internal stock equity $400,000

New common stock equity $1,000,000

Total liabilities & equity $2,000,000

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