1. (Cost of capital, capital structure, leveraged and unleveraged betas) Huugo Poss AS is well known international luxury fashion and style house which originates from Estonia. The company is currently re-evaluating its capital structure. The firm has 8-year coupon bonds outstanding with a face value of $ 400 million and interest expenses of $18.0 million a year. This is the only debt obligation, the company has. The firm is rated BB and the default spread (on top of risk free rate) for BB rated bonds is 3.8%. There are 20 million shares trading at $10 a share and the current levered beta for the firm is 80. The risk-free rate is 2% and the market risk premium is 5%. The corporate tax rate (on profits) for the firm is 21%.

Questions:

a. Estimate the market value of outstanding debt at the firm today.

b. Estimate the current cost of capital for the firm