ABN Lid., A company had 40 million shares at Rs.25 per share, and Rs. 32 million in debt outstanding at the end of 2019. The firm has a beta of 0.9, EBIT of Rs. 89 million and a book value of equity of Rs. 250 million.

ABN Lid., A company had 40 million shares at Rs.25 per share, and Rs. 32 million in debt outstanding at the end of 2019. The firm has a beta of 0.9, EBIT of Rs. 89 million and a book value of equity of Rs. 250 million. The following tables summarizes the interest rates for the company at different level of debt. Debt to capital ratio (%) Bond Rating 0 AAA 10 AAA 20 A 30 BB 40 B 50 B 60 CC 70 C 80 D 90 D Tax rate is 40%, Market risk premium is 5.5%, T-Bond rate is 6%. Note: Interest rate on debt will depend upon bond rating. The range of interest is given below. Kindly use it according to your assumption. Bond Rating Interest rate on debt (%) AAA 3.5 to 4 AA 4.1 to 5 A 5.1 to 6.1 BBB 6.2 to 7 BB 7.1 to 7.9 B 8 to 9 CCC 9.1 to 10 CC 10.1 to 10.6 C 10.7 to 11.4 D 11.5 to 12 You are required to calculate the cost of equity at each level of debt, return on equity at each level of debt and return on capital.

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