Question: Bethlehem Steel one of the oldest and largest steel companies

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 cost of debt 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%.

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  • CreatedApril 15, 2015
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