Consider a change in the capital structure. Increase or decrease the company’s debt ratio by 20% assuming it is under 50%. Otherwise decrease it by 10%.
Use the synthetic bond rating to determine the impact on the bond’s rating. Remember when you increase the debt by 20% you raise the interest charges. Use the 10-15 year bond’s yield to maturity as the interest rate on the new debt. Calculate the additional interest charges. With the new rating use the bond beta to find the new pre-tax cost of debt.
Relever the beta to reflect the new debt ratio. Recalculate the cost of equity with the CAPM.