You have been asked to estimate the cost of capital for NewTel, a telecomm firm. The firm has the following characteristics:? There are 100 million shares outstanding trading at $250 per share.
The firm has a book value of ten-year debt of $10 billion and interest expenses of $600 million on the debt. The firm is not rated, but it had operating income of $2.5 billion last year. Firms with an interest coverage ratio of 3.5 to 4.5 were rated BBB.
The unlevered beta of other telecomm firms is 0.80. ?The treasury bond rate is 6%, and the tax rate for the firm is 35%.
a. Estimate the market value of debt for this firm.
b. Based upon the synthetic rating, estimate the cost of debt for this firm.
c. Estimate the cost of capital for this firm.