Question 6

Company ABC, a social media firm, has the following characteristics:

There are 200 million shares outstanding, trading at $100 per share.

The firm has a book value of debt $50 billion (with a maturity of 10 years) and interest expenses of $1 billion on the debt. The firm is not rated, but it has operating income of 2.5 billion last year.

The tax rate for the firm is 30%.

The equity risk premium is 6%

The estimated bond ratings and the corresponding default spreads for various ranges of interest coverage ratio are: