This problem is based on the appendix to this chapter. In May 2005, the credit rating agencies

Question:

This problem is based on the appendix to this chapter. In May 2005, the credit rating agencies downgraded the debt of General Motors Corporation (GM) to junk status.

a. Discuss the effect of this drop in credit status on the company’s WACC.

b. If you have been using the YTM for the firm’s bonds as your estimate of the cost of debt capital and you use the same estimation procedure following the downgrade, has your estimate become more or less reliable? Explain.

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking...