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 weighted average cost of capital at a 18% debt ratio. The long term treasury bond rate is 5%. Assume the market risk premium is 6%. Answer format is 12.3 for 12.30% and 17.55 for 17.55%. This is worth 30 points.

Debt Ratio	10%	18%
$ Debt	$ 1,500
EBIT	$ 1,000
Interest Expenses	$120
Interest Coverage Ratio	6.15
Bond Rating	A
Interest Rate	5%
Tax Rate	40%
Beta	1.55

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. Weight your cost of equity by its proportion of capital (1 - Debt ratio). 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). Weighted average cost of capital: Add the weighted costs (equity and debt).

Answer: