You have been provided the information on the after-tax cost of debt and cost of capital of Mirador, which has a 10% debt-to-capital ratio. Estimate the after-tax cost of debt and cost of capital at a 20% debt-to-capital ratio. The long-term Treasury bond rate is 7%.

Debt Ratio (000) 10% 20% Extra Column

$ Debt $ 1,500

EBIT $ 1,000

Interest Expenses $ 120

EBIT Int. Coverage Ratio 8.33

Bond Rating AA

Interest Rate 8.00%

After-tax Cost of Debt 4.80%

Beta 1.06

Tax rate 40%

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%