Estimating Default Risk and Cost of Debt (2 marks)

a. If your company is rated, find the bond rating and estimate a default spread based on the rating. Add the default spread to the risk-free rate to estimate a pre-tax cost of debt.

b. Estimate a synthetic rating for your company, based upon financial ratios. If the company has an actual rating, compare the synthetic rating to the actual rating and explain the reasons for differences. If your company does not have an actual rating, use the synthetic rating to estimate a default spread for the companys debt and a pre-tax cost of debt based on that spread.

c. Estimate the marginal tax rate for your company, based on the country of incorporation and use that tax rate to compute an after-tax cost of debt for the company and its divisions (if they have their own costs of debt)