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 cost of equity at 16%. The long term treasury bond rate is 6%.

Debt Ratio	10%	16%
$ Debt	$ 1,500
EBIT	$ 1,000
Interest Expenses	$120
Interest Coverage Ratio	5.11
Bond Rating	A
Interest Rate	5%
Tax Rate	40%
Beta	1.43

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 equity:

Take the Beta and unlever it.

Then lever Beta it at the new debt ratio.

Multiple the levered Beta times the market risk premium to find the expected cost.