Estimate the cost of capital (up to two decimals) for the company using the following information:

The company has a book value of equity of $1 billion. There are 150 million shares, trading at $12/share. The average unlevered beta of other companies in the same business is 1.20.
The company has debt outstanding of $1 billion, with 5 years left to maturity and currently has a CCC bond rating and has a default spread of 7% over the risk-free rate.
The risk-free rate is 3%, the equity risk premium is 5% and the marginal tax rate for all companies is 40%.

Answer rating: 100% (QA)

Solution Market value of equity E P x N 12 x 150 1800 million Market value of debt D 1 ... View the full answer