Determining target leverage. A firm has an operating profit margin of 4% in a realistic worst case, and it is considered a moderately vulnerable business, so that it would be prudent to keep an interest coverage ratio of 3x in the realistic worst case. You have the following information from its most recent accounts: EBIT Sales Debt a. Equity (book value) Equity (market value) Answer the questions that follow, assuming that rating criteria and current bond market conditions are described by: Rating Criteria Credit Rating Debt Ratio @ BV (D/Cap) Interest coverage (average) $ 550 $ 8,000 $ 625 Market Yields Rating Interest rate $1,975 $4,375 A 0.2 to 0.35 10 A 8% BBB 0.35 to 0.5 5.5 BBB 9% BB 0.5 to 0.6 3 BB 10% Determine a target level of debt for the firm, both in $ and as a ratio to capital. What rating is the target debt likely to obtain? [Hint: work out three different scenarios, one for each of the credit ratings given in the table, and then pick the answer that is internally consistent.]