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You are calculating the cost of capital for Drill Corp. The firms capital structure consisted of accounts payables, operating leases, two bonds, and equity. Accounts
- You are calculating the cost of capital for Drill Corp. The firms capital structure consisted of accounts payables, operating leases, two bonds, and equity. Accounts payables have a market value of $100 million, whereas operating lease has a debt value of $550 million. The first bond is a simple 30-year semiannual coupon paying bond with a book value of $180 million and market value of $130 million. The second is a zero-coupon bond with 10 years to maturity and $550 million face value. The firms equity has a book value of $600 million, but a market value of $1.3 billion.
The firm has a debt rating of BB, beta of 1.1, and tax rate of 35%. The expected return on the market portfolio is 12% and the risk-free rate is 5%. From professional journals, you also know yields associated with specific debt ratings, which are as the following
| AAA | AA | A | BBB | BB | B |
Yield (%) | 9.30 | 9.71 | 10.01 | 10.82 | 12.10 | 14.66 |
If the company assigns accounts payables a cost that is the same as the overall firm WACC, estimate the weighted average cost of capital for Drill Co.
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