1. As a financial analyst, you are analysing Company XYZ and calculating its cost of capital. The stock price of XYZ is 100 and it has 20 million shares outstanding. XYZs debt rating is BB. The book value of debt is 600 million and market value of debt is 500 million. XYZs tax rate is 20%. Please round your results to the second digit to the right of the decimal point.

REQUIRED:

1. You have also collected information on capital markets. The risk free rate is 1%. The return on the S&P 500 index is 9%. The relationship between debt rating and debt beta is shown in the following table.

Rating	AAA	AA	A	BBB	BB	B	CCC
Average Beta	0.05	0.05	0.05	0.1	0.17	0.26	0.31

What is the value of market risk premium? What is the cost of debt for Company XYZ.

[10 marks]