What is its wacc after the downgrade

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Reference no: EM131979169

Time Warner currently has 100 million outstanding shares and its current stock price is $20 per share. Its equity CAPM is 1.11, the risk-free rate is 2%, and the expected return on the market portfolio is 9.7%. The table below provides the credit spread (in basis points) by rating and maturity:

Credit Spread Maturity

Rating 1 Year 5 Years 10 Years

AAA 5 20 33

BBB 60 105 143

CCC 1125 1200 1400

Time Warner's debt has a market value of $1.2 billion. The corporate tax rate is 21%.

(a) What is Time Warner's WACC if its credit rating is AAA and its debt matures in 10 years?

(b) Time Warner's credit rating was downgraded from AAA to BBB. What is its WACC after the downgrade? Assume that the debt continues to mature in 10 years and that the cost of equity is not affected.

(c) You reestimate the equity CAPM and realize that it increased to 1.34. Based on the downgrade in part (b), what is Time Warner's new WACC?

Reference no: EM131979169

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