Bethlehem Steel, one of the oldest and largest steel companies in the United States, is considering the

Question:

Bethlehem Steel, one of the oldest and largest steel companies in the United States, is considering the question of whether it has any excess debt capacity. The firm has $527 million in market value of debt outstanding and $1.76 billion in market value of equity. The firm has earnings before interest and taxes of $131 million and faces a corporate tax rate of 36%. The company’s bonds are rated BBB, and the is 8%. At this rating, the firm has a probability of default of 2.30%, and the cost of bankruptcy is expected to be 30% of firm value.
a. Estimate the unlevered value of the firm.
b. Estimate the levered value of the firm, using the APV approach, at a debt ratio of 50%. At that debt ratio, the firm’s bond rating will be CCC, and the probability of default will increase to 46.61%.
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...