$(30$ points$)$ XYZ Company has a credit rating of B$.$ Use the data in Exhibit $9\mathrm{.}6$ to estimate its cost of debt. Assume a market risk premium of $6\%.$

In Exhibit $9\mathrm{.}6,$ we present average recovery rates$-$based on market prices $30$ days after the default event$-$for senior unsecured bonds partitioned by the bond's credit rating as measured by Moody's. This exhibit presents average recovery rates by rating class within a given number of years until default. The Year $1$ column in this exhibit is the recovery rate after the bond was rated in the rating class for that row if it defaulted within the first year; the Year $2$ column is the recovery rate after the bond was rated in the rating class for that row if it defaulted in the first or second year; and so forth. We do not report the statistics for Aaa bonds because at most five Aaa bonds defaulted in the first five years after they had been rated Aaa; and three of those bonds were Icelandic bank bonds, which had an average recovery of $3\mathrm{.}33\%,$ and thus, the recovery rates are not generally representative of Aaa bonds. This exhibit shows that, on average, for a given column $($number of years after the bond was rated$),$ higher ratings generally have slightly higher recovery rates. For example, recovery rates on investment$-$grade debt are greater than the recovery rates on speculative$-$grade debt in all five years.

$\backslash$table$[[$EXHIBIT $9\mathrm{.}6,\backslash$table$[[$Average Recovery Rates by Credit Ratings of Senior Unsecured Bonds by Year Prior$],[$to Default $(1983-2015)$ from Moody's Investors Service$*]]],[$red Bond Rating,Year $1,$Year $2,$Year $3,$Year $4,$Year $5,$Average$],[$Aaa$.,($Too Few Observations to Report$)"*],[,\backslash$table$[[37\mathrm{.}2\%],[30\mathrm{.}4\%]],\backslash$table$[[39\mathrm{.}0\%],[42\mathrm{.}6\%]],\backslash$table$[[38\mathrm{.}1\%],[45\mathrm{.}0\%]],\backslash$table$[[44\mathrm{.}0\%],[44\mathrm{.}5\%]],\backslash$table$[[43\mathrm{.}2\%],[44\mathrm{.}2\%]],\backslash$table$[[40\mathrm{.}3\%],[41\mathrm{.}3\%]],],[$Baa$.,42\mathrm{.}9\%,44\mathrm{.}4\%,44\mathrm{.}7\%,44\mathrm{.}6\%,44\mathrm{.}4\%,44\mathrm{.}2\%],[,,,,,,,],[$Caa$-$C$.,38\mathrm{.}0\%,38\mathrm{.}4\%,38\mathrm{.}4\%,38\mathrm{.}9\%,39\mathrm{.}0\%,38\mathrm{.}5\%],[\backslash$table$[[$Investment grade $.],[$Speculative grade.$]],\backslash$table$[[40\mathrm{.}0\%],[38\mathrm{.}3\%]],\backslash$table$[[43\mathrm{.}5\%],[38\mathrm{.}1\%]],\backslash$table$[[44\mathrm{.}4\%],[38\mathrm{.}2\%]],\backslash$table$[[44\mathrm{.}6\%],[38\mathrm{.}6\%]],\backslash$table$[[44\mathrm{.}4\%],[39\mathrm{.}0\%]],\backslash$table$[[43\mathrm{.}4\%],[38\mathrm{.}4\%]]],[$All ratings $.,38\mathrm{.}3\%,38\mathrm{.}5\%,38\mathrm{.}7\%,39\mathrm{.}2\%,39\mathrm{.}5\%,38\mathrm{.}8\%]]$

See Exhibit $21$ in Moody's Corporate Default and Recovery Rates, $1920-2015,$ Moody's Investors Service, February $2016,$ reprinted with permission.

${?}^{****}$ We did not report the rates for Aaa bonds because only five bonds defaulted and three of those bonds were Icelandic bank bonds, which had an average recovery of $3\mathrm{.}33\%,$ and thus, the recovery rates are not generally representative of Aaa bonds.