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Estimate the market value of debt for firm

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Reference no: EM132466884

You have been asked to estimate the cost of capital for USF Inc. The firm has the following characteristics

  • There are 100 million shares outstanding, trading at $250 per share.
  • The firm has a book value of debt with a maturity of 6 years of $10 billion and interest expenses of $600 million on the debt.
  • The firm is not rated, but had operating income of $2.5 billion last year. 
  • Firms with an interest coverage ratio of 3.5 to 4.5 were rated BBB, and the default spread was 1%.
  • Firm's tax rate is 35%

The Treasury bond rate is 6%, and the unlevered beta of other telecom firms is 0.80

  • Estimate the market value of debt for this firm.
  • Based on the synthetic rating, estimate the cost of debt for this firm.
  • Estimate the cost of capital for this firm.

Reference no: EM132466884

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