1) Jake the Dog, Inc is investing in a new portable iguana killing machining that will cost $200,000. The machine has a useful life of 6 years and falls in the 5-year property class of the depreciation purposes. The IRS MACRS schedule for the six years is (1) 20% (2) 32% (3) 19.2% (4) 11.52% (5) 11.52% (6) 5.76%. It will generate $50,000 per years of 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 60,000 shares of common stock outstanding that is selling for $45 per share. This stock has a beta of 2.45, 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% divided and sells for $40 per share.

A) What is the cost of EQUITY capital?

18.15%

19.15%

20.15%

21.15%

B) What is the cost of PREFERRED capital?

13.25%

13.75%

9.25%

12.75%

14.75%