Question 1 (5 marks) You are trying to estimate the cost of capital for TransOhio Steel Corporation. The firm has provided you with the following information: " There are 250 million shares outstanding, trading at $ 40 a share. N The market value of the debt is $ 6000 million. The firm is reported earnings before interest and taxes of $ 200 million and interest expenses of $ 400 million. The Treasury bond rate is 4% and the market risk premium is 5.5%. The firm is in only one business, steel, and the unlevered beta for steel companies is 0.80. Tax rate for the firm is 40%. a) Estimate TransOhio beta (1 mark) b) Estimate the cost of equity for the firm (1 mark) c) Estimate a synthetic rating for TransOhio Steel, based upon the interest coverage ratio. The table below summarizes the relationship between interest coverage ratios and ratings for large U.S. firms. (I mark) Interest Coverage Ratio 12.5 Rating Default Spread AAA 0.20% 9.50 12.50 AA 0.50% 7.50-9.50 A+ 10,80% 6.00-7.50 A 1.00% 4.50-6.00 A- 1.25% 3.50-4.50 BBB 1.50% 3.00-3.50 BB 2.50% 2.50-3.00 B+ 3.00% 2.00-2.50 B 3.75% 1.50-2.00 B- 4.75% 1.25-1.50 0.80-1.25 0.50-0.80