Santa Fe Pacific has a beta of 1.25 (estimated from a linear regression). It currently...
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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%
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