You are calculating the cost of capital for Drill Corp. The firm’s capital structure consisted of...

You are calculating the cost of capital for Drill Corp. The firm’s capital structure consisted of accounts payables, operating leases, two bonds, and equity. Accounts payables have a market value of $100 million, whereas operating lease has a debt value of $550 million. The first bond is a simple 30-year semiannual coupon paying bond with a book value of $180 million and market value of $130 million. The second is a zero-coupon bond with 10 years to maturity and $550 million face value. The firm’s equity has a book value of $600 million, but a market value of $1.3 billion.

The firm has a debt rating of BB, beta of 1.1, and tax rate of 35%. The expected return on the market portfolio is 12% and the risk-free rate is 5%. From professional journals, you also know yields associated with specific debt ratings, which are as the following

	AAA	AA	A	BBB	BB	B
Yield (%)	9.30	9.71	10.01	10.82	12.10	14.66

If the company assigns accounts payables a cost that is the same as the overall firm WACC, estimate the weighted average cost of capital for Drill Co.

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