The Company North Steel S.A. generates an EBIT of $250 million per year and has perpetual debt with a nominal value of $1000 million. The Company pays a 6% coupon rate for this debt. The risk free rate is 2.5%. If the Company issues new perpetual debt with the same seniority as the previous debt, with a nominal value of $500 million and an annual coupon of 10%; using the table below, what will be the interest rate (rD) of the new debt?

 

Transcribed Image Text:

Interest Coverage Ratio (ICR) Less than 2.5 Between 2.5 and 4.49 Between 4.5 and 6.49 Between 6.5 and 8.5 More than 8.5 Ratin g B BB BBB A AA Spread 10.0% 5.0% 3.0% 2.0% 1.0% Interest Coverage Ratio (ICR) Less than 2.5 Between 2.5 and 4.49 Between 4.5 and 6.49 Between 6.5 and 8.5 More than 8.5 Ratin g B BB BBB A AA Spread 10.0% 5.0% 3.0% 2.0% 1.0%

Answer rating: 100% (QA)

To determine the interest rate rD of the new debt issued by North Steel SA we need to calculate the ... View the full answer