You have been asked to estimate the cost of capital for NewTel, a telecomm firm. The firm has the following characteristics:

* There are 100 million shares outstanding, trading at $250 per share.

* The firm has a book value of debt of $10 billion with a maturity of 6 years and interest expenses of $600 million on the debt. The firm is not rated, but it had operating income of $2.5 billion last year. Firms with an interest coverage ratio of 3.5 to 4.5 were rated BBB. (Default spread is 1%)

* The average beta of other telecom firms is 1.2.

* The Treasury bond rate is 6%, and the tax rate for the firm is 35%.

* The market risk premium (MRP) is 5.5%.

Q18. Based on the synthetic rating, estimate the cost of debt for this firm.

a. 6.00%

b. 7.00%

c. 8.00%

d. 9.00%

Answer:

Q19. Estimate the market value of debt for this firm.

1. $8,523.345 million
2. $7,365.987 million
3. $9,523.345 million
4. $8,975.098 million

Answer:

Q20. Estimate the market value of equity for this firm.

1. $25,000 million
2. $26,000 million
3. $27,000 million
4. $28,000 million

Answer:

Q21. Estimate the cost of capital for this firm.

1. 11.775%
2. 10.378%
3. 12.876%
4. 11.876%

Answer: