You have been provided the information on the cost of debt and cost of capital that a company will have at a 10% debt ratio, and asked to estimate the weighed after tax cost of debt at 18%. The long term treasury bond rate is 7%. Assume the market risk premium is 6%. Answer format is 12.3 for 12.30% and 17.55 for 17.55%.

Debt Ratio	10%	18%
$ Debt	$ 1,500
EBIT	$ 1,000
Interest Expenses	$120
Interest Coverage Ratio	6.56
Bond Rating	A
Interest Rate	6%
Tax Rate	40%
Beta	1.22

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%

Cost of debt:

Add the Spread to the Long-term treasury bond rate.

make an after-tax adjustment (1 - Tax rate).

Weight your cost of debt by its proportion of capital (Debt ratio).