# Question

Upjohn, another major pharmaceutical company, is also considering whether it should borrow more. It has $664 million in book value of debt outstanding and 173 million shares outstanding at $30.75 per share. The company has a beta of 1.17, and faces a tax rate of 36%. The Treasury bond rate is 6.50%.

a. If the interest expense on the debt is $55 million, the debt has an average maturity of 10 years, and the company is currently rated AA– (with a market interest rate of 7.50%), estimate the market value of the debt.

b. Estimate the current cost of capital.

c. It is estimated that if Upjohn moves to its optimal debt ratio, and no growth in firm value is assumed, the value per share will increase by $1.25. Estimate the cost of capital at the optimal debt ratio.

a. If the interest expense on the debt is $55 million, the debt has an average maturity of 10 years, and the company is currently rated AA– (with a market interest rate of 7.50%), estimate the market value of the debt.

b. Estimate the current cost of capital.

c. It is estimated that if Upjohn moves to its optimal debt ratio, and no growth in firm value is assumed, the value per share will increase by $1.25. Estimate the cost of capital at the optimal debt ratio.

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