Question

You are calculating the cost of capital for Drill Corp. The firm's capital structure consisted of...

You are calculating the cost of capital for Drill Corp. The firm's capital structure consisted of operating leases, two bonds, and equity. The operating lease has a debt value of $500 million. The first bond is a simple 30-year semiannual coupon paying bond with a book value of $200 million and market value of $125 million. The second is a zero-coupon bond with 10 years to maturity and $500 million face value. The firm's equity has a book value of $600 million, but a market value of $1 billion.

The firm has a debt rating of BB, beta of 1.8, and tax rate of 35%. The expected market risk premium is 6.5%, considering a risk-free rate of 5%. From professional journals, you also know yields associated with specific debt ratings, which are as the following

Yield (%) AAA     AA      A           BBB        BB       B

              9.30     9.79 10.08        10.89       12.75     14.66

Estimate the weighted average cost of capital for Drill Co.

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Answer #1

fiirm has debt rating of BB so cost of of bebt is 12.75%

after tax cost of debt = cost of debt(1-tax rate )

=12.75%(1-0.35)

=8.2875%

cost of equity = risk free rate +beta*(market risk premium)

=5%+1.8(6.5%)

=16.70%

market value of zero coupon bond

plz leave me positive rating thank you

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