10. This question guides you to think about the role of credit rating agencies. Suppose S&P credit rating is the only thing that determines companies' cost of borrowing (interest rate on debt). Below is the interest rate associated with each credit rating.

Credit rating Interest rate

AAA 3% AA 3.5% A 4.5% BBB 5.5% BB 7.5%

Consider a company that is issuing a ten-year bond with par value $1 billion today.

(a) Suppose the company currently has a credit rating of AA. How much interest expense can it save over the next ten years if its credit rating becomes AAA?

(b) Suppose the company currently has a credit rating of BBB. How much additional interest expense does it incur over the next ten years if its credit rating drops to BB?