This problem is based on the appendix to this chapter. In May 2005, the credit rating agencies downgraded the debt of General Motors Corporation (GM) to junk status. a. Discuss the effect of this drop in credit status on the company’s WACC. b. If you have been using the YTM for the firm’s bonds as your estimate of the cost of debt capital and you use the same estimation procedure following the downgrade, has your estimate become more or less reliable? Explain.
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