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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 30%. The long term treasury bond rate is 7%. 10% Debt Ratio 30% $ Debt $ 1,500 EBIT $ 1,000 Interest Expenses $ 120 8.33 Interest Coverage Ratio 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% O a. 13.28% O b. 10.56% O c. 11.42% O d. 5.98% 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 30%. The long term treasury bond rate is 7%. 10% Debt Ratio 30% $ Debt $ 1,500 EBIT $ 1,000 Interest Expenses $ 120 8.33 Interest Coverage Ratio 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% O a. 13.28% O b. 10.56% O c. 11.42% O d. 5.98%