Question
Please show work 1. You have been provided the information on the after-tax cost of debt and cost of capital that a company will have
Please show work
1. You have been provided the information on the after-tax cost of debt and cost of capital that a company will have at a 10% debt ratio, and asked to estimate the after-tax cost of debt and cost of capital at 20%. The long term treasury bond rate is 7%.
Debt Ratio 10% 20%
$ Debt $ 1,500
EBIT $ 1,000
Interest Expenses $ 120
Interest Coverage Ratio 8.33
Bond Rating AA
Interest Rate 8.00%
After-tax Cost of Debt 4.80%
Beta 1.06
Cost of Equity 12.83%
Cost of Capital 11.78%
The interest coverage ratios, ratings and spreads are as follows:
Coverage Ratio Rating Spread over Treasury
> 10 AAA 0.30%
7 -10 AA 1.00%
5 - 7 A 1.50%
3 - 5 BBB 2.00%
2- 3 BB 2.50%
1.25 - 2 B 3.00%
0.75 - 1.25 CCC 5.00%
0.50 - 0.75 CC 6.50%
0.25 - 0.50 C 8.00%
0.25 D 10.00%
a.
14.40%
b.
9.20%
c.
11.70%
d.
13.40%
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started