QUESTION

# Cost of Debt and Equity

The manager of Sensible Essentials conducted an excellent seminar explaining debt and equity financing and how firms should analyze their cost of capital. Nevertheless, the guidelines failed to fully demonstrate the essence of the cost of debt and equity, which is the required rate of return expected by suppliers of funds.

You are the Genesis Energy accountant and have taken a class recently in financing. You agree to prepare a PowerPoint presentation of approximately 6–8 minutes using the examples and information below:

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 • drprissy 1 orders completed$6.90