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 25%. The long term treasury bond rate is 7%. This is worth 10 points.

Debt Ratio	10%	25%
$ Debt	$ 1,500
EBIT	$ 1,000
Interest Expenses	$120
Interest Coverage Ratio	5.44
Bond Rating	A
Interest Rate	7%
Tax Rate	40%
Beta	1.25

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. Network connection lost. (Autosave failed).

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