Select a company from the list of S & P 500 stock index. Use the company's Annual report to estimate Market value of Debt (Long term Debt). Estimate the company's beta and required return on equity using the CAPM. Finally estimate the firm overall cost of capital. Write your answer in word and uploaded to dropbox.
Estimating market value of debt is next to impossible as most debts are not actively traded in the market. Furthermore, you know that some bonds are likely to get downgraded, others default, and recovery rate is fairly uncertain. Estimating market value of a firm's debt is very difficult if not impossible. As you know in estimating Weighted Average Cost of Capital, one needs to have market value as opposed to book vlaue. To remedy the above problem for estimating market value of debt use book value of short term debt one year and higher and then add 1/2 of book value of long term debt to arrive at market value of debt. This is used by KMV to calculate likelihood of default for publicly listed company.