Your company uses debt financing to partially fund projects. The YTM on the debt is 8%. The probability of default for each bond is 5%, and the loss if the bond defaults is 55%. What is the expected return to debt holders/appropriate cost of debt for your company?
Assume the bonds in the previous question had a beta of 0.40. The expected return of the market is 10% and the risk-free rate is 2%. What is the expected return to debt holders using the debt beta approach?