Question
Debt Cost of Capital In mid-2009, Rite Aid had CCC-rated, 14-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity
Debt Cost of Capital
In mid-2009, Rite Aid had CCC-rated, 14-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 3%. Suppose the market risk premium is 5% and you believe Rite Aid's bonds have a beta of 0.33. The expected loss rate of these bonds in the event of default is 51%. What annual probability of default would be consistent with the yield to maturity of these bonds in mid-2009?
Therequired returnfor this investment isAnswer ......
%. (Round to two decimal places.)
Theannual probability of defaultisAnswer .......
%. (Round to two decimal places.)
In mid-2015, Rite-Aid's bonds had a yield of 6.8%, while similar maturity Treasuries had a yield of 1.5%. Whatprobability of default would you estimate now? The probability of default will beAnswer ......
%. (Round to two decimal places.)
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