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Estimate the cost of capital (up to two decimals) for the company using the following information: The company has a book value of equity of

Estimate the cost of capital (up to two decimals) for the company using the following information:

  • The company has a book value of equity of $1 billion. There are 150 million shares, trading at $12/share. The average unlevered beta of other companies in the same business is 1.20.
  • The company has debt outstanding of $1 billion, with 5 years left to maturity and currently has a CCC bond rating and has a default spread of 7% over the risk-free rate.
  • The risk-free rate is 3%, the equity risk premium is 5% and the marginal tax rate for all companies is 40%.

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