Question: Debt Rating AAA AA A BBB BB B CCC Average Debt Beta 0.05 0.05 0.05 0.10 0.17 0.26 0.31 COMPANY MARKET VALUE OF EQUITY ($M)

Debt Rating AAA AA A BBB BB B CCC
Average Debt Beta 0.05 0.05 0.05 0.10 0.17 0.26 0.31
COMPANY MARKET VALUE OF EQUITY ($M) MARKET VALUE OF DEBT ($M) DEBT RATING YIELD TO MATURITY OF BONDS MARGINAL TAX RATE
XYZ COMPANY $4,500 $3,500 CCC 5.20% 35%

SUPPOSE THE RISK-FREE RATE IS 2% AND EXPECTED MARKET RISK PREMIUM IS 6%. THE EFFECTIVE CPST OF DEBT AFTET TAX COST OF DEBT FOR XYZ IS CLOSEST TO____%. (HINT: NOT ALL THE INFORMATION IS USEFUL. YOU NEED TO DETERMINE WHAT INFORMATION OR DATA TO USE).

A. 3.86%

B. 2.5%

C. 5.2%

D. 3.38%

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