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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,

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 BETA at 23%. The long term treasury bond rate is 5%. Assume the

Debt Ratio

10%

23%

$ Debt

$ 1,500

EBIT

$ 1,000

Interest Expenses

$120

Interest Coverage Ratio

5.02

Bond Rating

A

Interest Rate

7%

Tax Rate

40%

Beta

1.62

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%

Take the Beta and unlever it. Then lever Beta it at the new debt ratio.

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