Problem 2Below you are provided information on the after-tax cost of debt and co

Problem
2Below you are provided information on the after-tax
cost of debt and cost of capital that a company will have at a 10% debt ratio.
Please estimate the after-tax cost of debt and the cost of capital at a 20%
debt ratio. The long term Treasury bond rate is 4% and the interest coverage
ratios synthetic ratings and estimated spreads are as follows: Coverage
ratio Rating
Spread >10 AAA 0.30% 7-10 AA 1%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 C 8% Debt
Ratio 10% 20% $
Debt 1500 EBIT 500 Interest
Expense 82.5 Interest
Coverage Ratio 6.06 Bond
Rating A Interest
Rate 5.5% After-tax
Cost of Debt 3.3% Beta 1.06 Cost
of equity 10.36% Cost
of Capital 9.65%