Discuss and consider different factors such as : WACC, Net Income, Retained Earnings, estimated leverage ranges per rating class A, cash flow, etc.

Martina Valles has just been hired as the new CFO for Mintral, a large US industrial company. One of her first concerns when studying the financials of Mintral is whether the firm is exploiting all possible financial benefits. In other words: Is Mintral's capital structure optimal? One approach to optimize Mintral's capital structure, that Martina and her team are investigating, is to minimize the firm's cost of capital. Martina has asked Carlos, one of her junior team members, to provide some analysis in this area. As a first step towards his analysis, Carlos collected information on the current capital structure and cost of capital of Mintral and the current conditions in the financial markets: As a second step in his analysis, Carlos was wondering how the cost of capital would change if Mintral were to issue more equity and use the proceeds to retire debt or vice versa. From his university studies, he remembers reading in chapter 17.7 in his finance textbook by Ross, Westerfield and Jaffe (available in the Canvas course) that the CAPM can be used to find company betas at different leverage levels and consequently cost of equity at different leverage levels. But what about the cost of debt? How would that change if leverage changed? Carlos found some useful information from WRDS and Standard and Poors, one of the leading rating agencies. Source: Compustat S8P Ratings database, WRDS Financial Ratios Suite. Sample: US firms excluding SIC codes 60-67. Rating: S\&P Domestic Long Term Issuer Credit Rating. In order to consider how the cost of capital changes if the capital structure changes, Carlos decided to focus on the long-term debt to capital ratio and the market values for debt and equity. He developed two schedules that link the rating, the cost of debt, and the long-term debt to capital ratio as shown in Tables 4 and 5 : Finally, Carlos is wondering how to explain his analyses to Martina Valles and the rest of the team. As there are several junior members in the team, Carlos believes that he needs to start by explaining the basics: - What are bond ratings? - How do rating agencies establish ratings? - How can the average nominal interest rate on long-term debt of 3.5% be interpreted? - Is Mintral's rating of A justified? Finally, Carlos is wondering how to explain his analyses to Martina Valles and the rest of the team. As there are several junior members in the team, Carlos believes that he needs to start by explaining the basics: - What are bond ratings? - How do rating agencies establish ratings? - How can the average nominal interest rate on long-term debt of 3.5% be interpreted? - Is Mintral's rating of A justified? Then, Carlos wants to focus on the two schedules that he developed in Tables 4 and 5, explain the logic and calculations that result in these schedules and recommend an optimal capital structure for Mintral. Carlos is aware that he made some simplifying assumptions when developing his two schedules and he knows that he needs to clearly communicate those to Martina Valles and the rest of the team. Martina Valles has just been hired as the new CFO for Mintral, a large US industrial company. One of her first concerns when studying the financials of Mintral is whether the firm is exploiting all possible financial benefits. In other words: Is Mintral's capital structure optimal? One approach to optimize Mintral's capital structure, that Martina and her team are investigating, is to minimize the firm's cost of capital. Martina has asked Carlos, one of her junior team members, to provide some analysis in this area. As a first step towards his analysis, Carlos collected information on the current capital structure and cost of capital of Mintral and the current conditions in the financial markets: As a second step in his analysis, Carlos was wondering how the cost of capital would change if Mintral were to issue more equity and use the proceeds to retire debt or vice versa. From his university studies, he remembers reading in chapter 17.7 in his finance textbook by Ross, Westerfield and Jaffe (available in the Canvas course) that the CAPM can be used to find company betas at different leverage levels and consequently cost of equity at different leverage levels. But what about the cost of debt? How would that change if leverage changed? Carlos found some useful information from WRDS and Standard and Poors, one of the leading rating agencies. Source: Compustat S8P Ratings database, WRDS Financial Ratios Suite. Sample: US firms excluding SIC codes 60-67. Rating: S\&P Domestic Long Term Issuer Credit Rating. In order to consider how the cost of capital changes if the capital structure changes, Carlos decided to focus on the long-term debt to capital ratio and the market values for debt and equity. He developed two schedules that link the rating, the cost of debt, and the long-term debt to capital ratio as shown in Tables 4 and 5 : Finally, Carlos is wondering how to explain his analyses to Martina Valles and the rest of the team. As there are several junior members in the team, Carlos believes that he needs to start by explaining the basics: - What are bond ratings? - How do rating agencies establish ratings? - How can the average nominal interest rate on long-term debt of 3.5% be interpreted? - Is Mintral's rating of A justified? Finally, Carlos is wondering how to explain his analyses to Martina Valles and the rest of the team. As there are several junior members in the team, Carlos believes that he needs to start by explaining the basics: - What are bond ratings? - How do rating agencies establish ratings? - How can the average nominal interest rate on long-term debt of 3.5% be interpreted? - Is Mintral's rating of A justified? Then, Carlos wants to focus on the two schedules that he developed in Tables 4 and 5, explain the logic and calculations that result in these schedules and recommend an optimal capital structure for Mintral. Carlos is aware that he made some simplifying assumptions when developing his two schedules and he knows that he needs to clearly communicate those to Martina Valles and the rest of the team