Estimate what the cost of capital would be

Reference no: EM132077917

Question: Santa Fe Pacific has a beta of 1.25 (estimated from a linear regression). It currently has debt outstanding of $1.34 billion. Its stock price is $18.25 and there are 183.1 million shares outstanding. The expected ratings and the costs of debt for Santa Fe Pacific at different debt levels are shown in the following table:

D/(D+E)	Rating	Cost of debt (pretax)
10%	AAA	6.23%
30%	A-	7.43%
60%	B-	10.93%
80%	CCC	11.93%
90%	CC	13.43%

Estimate what the cost of capital would be at a debt to value ratio of 80%. Assume a tax rate of 40%, a T-bond rate of 7%, and market risk premium of 5.5%.

Reference no: EM132077917

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