HPCo is a computer manufacturer that is expected to invest in a project to produce new software.
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HPCo is a computer manufacturer that is expected to invest in a project to produce new software. HPCo has an unlevered beta of 1.90. The unlevered beta of software producers is 1.50. The market value of equity (CP) for HPCo is $80M and the market value of debt is $20M. HPCo plans to maintain this debt/CP ratio for this project. HPCo's bonds are rated Baa2/BBB. The risk-free rate is 5% and the market risk premium is 4%. The tax rate is 40%.
Rating and default spread according to the company's interest coverage ratio
Interest coverage ratio | Rating | Default gap | |
---|---|---|---|
> | ≤ to | ||
-100,000 | 0.199999 | D2/D | 12.00% |
0.2 | 0.649999 | Caa/CCC | 10.50% |
0.65 | 0.799999 | Ca2/CC | 9.50% |
0.8 | 1.249999 | C2/C | 8.75% |
1.25 | 1.499999 | B3/B- | 7.25% |
1.5 | 1.749999 | Ba1/BB+ | 6.50% |
1.75 | 1.999999 | Ba2/BB | 5.50% |
2 | 2.2499999 | B1/B+ | 4.00% |
2.25 | 2.49999 | B2/B | 3.00% |
2.5 | 2.999999 | Baa2/BBB | 2.00% |
3 | 4.249999 | A3/A- | 1.30% |
4.25 | 5.499999 | A2/A | 1.00% |
5.5 | 6.499999 | A1/A | 0.85% |
6.5 | 8.499999 | Aa2/AA | 0.70% |
8.5 | 100,000 | Aaa/AAA | 0.40% |
answer to the following questions from the values provided in the lists
- What is HPCo's leveraged beta taking into account its new project?
- What is HPCo's cost of equity
- What is HPCo's after-tax cost of debt?
- What is HPCo's weighted average cost of capital?
Related Book For
Operations Management
ISBN: 9781260547610
2nd International Edition
Authors: Gerard Cachon, Christian Terwiesch
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