Answered step by step
Verified Expert Solution
Question
1 Approved Answer
10. You have been asked to estimate the cost of capital for NewTel, a telecom firm. The Treasury bond rate is 6%, the equity risk
10. You have been asked to estimate the cost of capital for NewTel, a telecom firm. The Treasury bond rate is 6%, the equity risk premium is 5.5%, and the unlevered beta of other telecom firms is 0.80. The tax rate is 35%. The firm has the following characteristics . There are 100 million shares outstanding, trading at $250 per share . The firm has bank debt with a maturity of six years, a book value of $10 billion, and annual interest expenses of $600 million. 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%), Assume the beta of debt is zero Newtel has $2 billion in face value of four-year convertible debt that pays a 4% annual coupon and is trading at 114% of par value. . a. b. c. d. e. f. Based on the synthetic rating, estimate the cost of debt for this firm Estimate the market value of bank debt for this firm. Split the value of convertible debt into separate debt and equity components What fraction of this firm is debt financed? Estimate the beta and the cost of equity for this firm Estimate the cost of capital for this firm
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started