1. You have been provided the information on the after-tax cost of debt and cost of capital that a company will have at a 10% debt ratio, and asked to estimate the after-tax cost of debt and cost of capital at 20%. The long term Treasury bond rate is 7%.

The interest coverage ratios, ratings and spreads are as follows: Coverage Ratio Rating Spread over Treasury > 10 AAA 7-10 AA 5-7 A 3-5 2-3 1.25-2 0.75 -1.25 0.50 -0.75 0.25 -0.50