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Estimate become more or less reliable

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Reference no: EM131101162

In May 2005, the credit rating agencies downgraded the debt of the General Motors Corporation (GM) to junk status.

a. Discuss the effect of this drop in credit status on the company's WACC.

b. If you have been using the yield to maturity for the firm's bonds as your estimate of the cost of debt capital and you use the same estimation procedure following the downgrade, has your estimate become more or less reliable? Explain.

Reference no: EM131101162

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