6. Santa Fe Pacific, a major rail operator with diversified operations, had earnings before interest, taxes, and depreciation of $637 million in 1993, with depreciation amount- ing to $235 million (offset by capital expenditure of an equivalent amount). The firm is in a steady state and is expected to grow 6% a year in perpetuity. Santa Fe Pacific had a beta of 1.25 in 1993 and debt outstanding of $1.34 billion. The stock price was $18.25 at the end of 1993, and there were 183.1 million shares outstand- ing. The expected ratings and the costs of debt at different levels of debt for Santa Fe are shown in the following table (the Treasury bond rate is 7%, and the firm faced a tax rate of 40% ): DI(DE) Rating Cost of Debt (Pretax) 0% AAA 6.23% 10% AAA 6.23% 20% A+ 6.93% 30% A- 7.43% 40% BB 8.43% 50% B+ 8.93% 60% B- 10.93% 70% CCC 11.93% 80% CCC 11.93% 90% CC 13.43%