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Estimate the new cost of capital-galt energy ab

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Galt Energy AB is a highly levered company with 25 million shares, trading at SEK 49/share and SEK 750 million in debt (in market and book value terms) outstanding. The pre-tax cost of debt for the company is 10%, the marginal tax rate is 40% and the levered beta for the company is 2.93. The risk free rate is 3% and the market risk premium is 5%.

A bondholder in the firm is willing to accept 25 million newly issued shares in the company in exchange for SEK 250 million in debt (which will be retired). This transaction will raise the company's bond rating to BBB and lower their pre-tax cost of debt to 7.5%.

Estimate the new cost of capital, if you go through with the swap?

NOTICE. Report your answer in a percentage form and round it up to a second decimal. Don't write '%' sign in the field. WRITE 9.97 if your answer is 9,97%.

HINT: First estimate the unlevered beta of the company.

Reference no: EM132668409

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