You have been asked to estimate the cost of capital for NewTel, a telecom firm. The firm has the following characteristics:

There are 100 million shares outstanding, trading at \($250\) per share.

The firm has a book value of debt with a maturity of six years of \($10\) billion, and interest expenses of \($600\) million on the debt. The firm is not rated, but it had operating income of \($2.5\) billion last year. (Firms with an interest coverage ratio of 3.5 to 4.5 were rated BBB, and the default spread was 1%.)

The tax rate for the firm is 35%.

The Treasury bond rate is 6%, and the unlevered beta of other telecom firms is 0.80.

a. Estimate the market value of debt for this firm.

b. Based on the synthetic rating, estimate the cost of debt for this firm.

c. Estimate the cost of capital for this firm.