1. 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 Ratio10%16%$ Debt$ 1,500EBIT$ 1,000Interest Expenses$120Interest Coverage Ratio5.11Bond RatingAInterest Rate5%Tax Rate40%Beta1.43The interest coverage ratios, ratings and spreads are as follows:Coverage RatioRatingSpread over Treasury> 10AAA0.30%7 -10AA1.00%5 – 7A1.50%3 – 5BBB2.00%2- 3BB2.50%1.25 – 2B3.00%0.75 – 1.25CCC5.00%0.50 – 0.75CC6.50%0.25 – 0.50C8.00%< 0.25D10.00%Cost of equity:Take the Beta and unlever it.Then lever Beta it at the new debt ratio.Multiple the levered Beta times the market risk premium to find the expected cost.2.You have been provided the information on the cost of debt and cost of capital that a company will have at a 10% debt ratio, and asked to estimate the cost of debt at 20%. The long term treasury bond rate is 5%. Assume the market risk premium is 5.8%. Answer format is 12.3 for 12.30% and 17.55 for 17.55%.Debt Ratio10%20%$ Debt$ 1,500EBIT$ 1,000Interest Expenses$120Interest Coverage Ratio6.64Bond RatingAInterest Rate5%Tax Rate40%Beta1.8The interest coverage ratios, ratings and spreads are as follows:Coverage RatioRatingSpread over Treasury> 10AAA0.30%7 -10AA1.00%5 – 7A1.50%3 – 5BBB2.00%2- 3BB2.50%1.25 – 2B3.00%0.75 – 1.25CCC5.00%0.50 – 0.75CC6.50%0.25 – 0.50C8.00%< 0.25D10.00%Cost of debt: Add the Spread to the Long-term treasury bond rate.3.You have been provided the information on the cost of debt and cost of capital that a company will have at a 10% debt ratio, and asked to estimate the BETA at 20%. The long term treasury bond rate is 6%. Assume theDebt Ratio10%20%$ Debt$ 1,500EBIT$ 1,000Interest Expenses$120Interest Coverage Ratio6.21Bond RatingAInterest Rate7%Tax Rate40%Beta1.76The interest coverage ratios, ratings and spreads are as follows:Coverage RatioRatingSpread over Treasury> 10AAA0.30%7 -10AA1.00%5 – 7A1.50%3 – 5BBB2.00%2- 3BB2.50%1.25 – 2B3.00%0.75 – 1.25CCC5.00%0.50 – 0.75CC6.50%0.25 – 0.50C8.00%< 0.25D10.00%Take the Beta and unlever it.Then lever Beta it at the new debt ratio.4. You have been provided the information on the cost of debt and cost of capital that a company will have at a 10% debt ratio, and asked to estimate the weighted cost of equity at 19%. The long term treasury bond rate is 6%. Assume the market risk premium is 6.5%. Answer format is 12.3 for 12.30% and 17.55 for 17.55%.Debt Ratio10%19%$ Debt$ 1,500EBIT$ 1,000Interest Expenses$120Interest Coverage Ratio5.08Bond RatingAInterest Rate6%Tax Rate40%Beta1.14The interest coverage ratios, ratings and spreads are as follows:Coverage RatioRatingSpread over Treasury> 10AAA0.30%7 -10AA1.00%5 – 7A1.50%3 – 5BBB2.00%2- 3BB2.50%1.25 – 2B3.00%0.75 – 1.25CCC5.00%0.50 – 0.75CC6.50%0.25 – 0.50C8.00%< 0.25D10.00%Cost of equity:Take the Beta and unlever it.Then lever Beta it at the new debt ratio.Multiple the levered Beta times the market risk premium to find the expected cost.Weight your cost of equity by its proportion of capital (1 - Debt ratio). 5. You have been provided the information on the cost of debt and cost of capital that a company will have at a 10% debt ratio, and asked to estimate the after tax cost of debt at 18%. The long term treasury bond rate is 7%. Assume the market risk premium is 6.4%. Answer format is 12.3 for 12.30% and 17.55 for 17.55%.Debt Ratio10%18%$ Debt$ 1,500EBIT$ 1,000Interest Expenses$120Interest Coverage Ratio6.65Bond RatingAInterest Rate6%Tax Rate40%Beta1.92The interest coverage ratios, ratings and spreads are as follows:Coverage RatioRatingSpread over Treasury> 10AAA0.30%7 -10AA1.00%5 – 7A1.50%3 – 5BBB2.00%2- 3BB2.50%1.25 – 2B3.00%0.75 – 1.25CCC5.00%0.50 – 0.75CC6.50%0.25 – 0.50C8.00%< 0.25D10.00%Cost of debt:Add the Spread to the Long-term treasury bond rate.make an after-tax adjustment (1 - Tax rate).6. You have been provided the information on the cost of debt and cost of capital that a company will have at a 10% debt ratio, and asked to estimate the weighed after tax cost of debt at 18%. The long term treasury bond rate is 7%. Assume the market risk premium is 6%. Answer format is 12.3 for 12.30% and 17.55 for 17.55%.Debt Ratio10%18%$ Debt$ 1,500EBIT$ 1,000Interest Expenses$120Interest Coverage Ratio6.56Bond RatingAInterest Rate6%Tax Rate40%Beta1.22The interest coverage ratios, ratings and spreads are as follows:Coverage RatioRatingSpread over Treasury> 10AAA0.30%7 -10AA1.00%5 – 7A1.50%3 – 5BBB2.00%2- 3BB2.50%1.25 – 2B3.00%0.75 – 1.25CCC5.00%0.50 – 0.75CC6.50%0.25 – 0.50C8.00%< 0.25D10.00%Cost of debt:Add the Spread to the Long-term treasury bond rate.make an after-tax adjustment (1 - Tax rate).Weight your cost of debt by its proportion of capital (Debt ratio).7. You have been provided the information on the cost of debt and cost of capital that a company will have at a 10% debt ratio, and asked to estimate the UNLEVERED BETA. The long term treasury bond rate is 7%. Assume theDebt Ratio10%23%$ Debt$ 1,500EBIT$ 1,000Interest Expenses$120Interest Coverage Ratio6.16Bond RatingAInterest Rate7%Tax Rate40%Beta1.85The interest coverage ratios, ratings and spreads are as follows:Coverage RatioRatingSpread over Treasury> 10AAA0.30%7 -10AA1.00%5 – 7A1.50%3 – 5BBB2.00%2- 3BB2.50%1.25 – 2B3.00%0.75 – 1.25CCC5.00%0.50 – 0.75CC6.50%0.25 – 0.50C8.00%< 0.25D10.00%8. You have been provided the information on the cost of debt and cost of capital that a company will have at a 10% debt ratio, and asked to estimate the weighted average cost of capital at a 18% debt ratio. The long term treasury bond rate is 6%. Assume the market risk premium is 6.4%. Answer format is 12.3 for 12.30% and 17.55 for 17.55%.Debt Ratio10%18%$ Debt$ 1,500EBIT$ 1,000Interest Expenses$120Interest Coverage Ratio6.2Bond RatingAInterest Rate6%Tax Rate40%Beta1.81The interest coverage ratios, ratings and spreads are as follows:Coverage RatioRatingSpread over Treasury> 10AAA0.30%7 -10AA1.00%5 – 7A1.50%3 – 5BBB2.00%2- 3BB2.50%1.25 – 2B3.00%0.75 – 1.25CCC5.00%0.50 – 0.75CC6.50%0.25 – 0.50C8.00%< 0.25D10.00%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).
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