Exhibit 4 provides pro forma debt total capital ratios . What interest rate do you expect LIST to have to pay at these various debt levels?" ( Assume that if LIST issues debt , it uses the proceeds to buy back Equity ) . The highest debt level in the Exhibit is 3 0%/6. You may want to look at 50 and $196 as well . At Each debt level , try to Estimate what bond rating the US I debt would have and what interest rate that would correspond to . I've the data on bond ratings and key financial ratios as a guide. It What are the costs of debt ?" For Example , should management worry about the possibility of bankruptcy ? Are the costs of financial distress likely to be high or low for LIST ? At Each debt level , Estimate the benefits of debt. Also , for each debt level , do a back- of - the - Envelope calculation of how big the value lost in financial distress has to be for that debt level to be optimal for the firm . You can do this by Estimating the costs of financial distress crudely as