1. You have been asked to estimate the cost of capital for Adelaide Enterprises, a company with a

signifificant debt load, and a depressed stock price. You have the following information:

The company has a book value of equity of $1 billion. There are 150 million shares, trading at

$4/share. The unlevered beta of other companies in the same business is 1.20. The company has

bank loans outstanding of $1 billion, with 5 years left to maturity and interest expenses of $40 million

a year. The company currently has a CCC bond rating and has a default spread of 7% over the

risk-free rate. The fifirm reported a net loss of -$15 million, but its operating income is expected to

be $32 million next year. The risk free rate is 3%, the equity risk premium is 5% and the marginal

tax rate for all companies is 25%. Estimate the cost of capital for the company, for next year.