The Debt Cost of Capital

The Debt Cost of Capital

14. In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity

of 2.05%.

a. What is the highest expected return these bonds could have?

b. At the time, similar maturity Treasuries have a yield of 1.5%. Could these bonds actually

have an expected return equal to your answer in part (a)?

c. If you believe Ralston Purina’s bonds have 0.5% chance of default per year, and that expected

loss rate in the event of default is 60%, what is your estimate of the expected return for these

bonds?

The Debt Cost of Capital