You are trying to estimate the value of Pear Corporation using the WACC approach. As a first step, you decided to estimate the companyâs cost of debt. While the companyâs current D/V is 0.20, you noticed that the company is expected to approximately double its D/V ratio next quarter. Therefore, you decided to work with a target D/V ratio equal to 0.40. You also noticed that the current rating of the companyâs debt is A and that this rating is expected to be downgraded to BBB- as a consequence of the expected increase in leverage. Therefore, you expect the company to have a BBB- rating from next quarter on. This motivated the collection of the information below.
U. S. Government Debt Treasuries)
Maturity
1 Year 30 Years
Historical Average Yield 2.70 4.30
Current Yield 0.55 3.10
Corporate Debt (A- Rating)
Maturity
1 Year 1 30 Years
Historical Average Spread 1.20 2 .10
Current Spread 0. 901 .30
Corporate Debt (BBB- Rating)
Maturity
1 Year 30 Years
Historical Average Spread 1.50 2.50
Current Spread 1.10 1.60
Note: All numbers above are in percentage points. The spread for the corporate debt is computed as the difference between the yields and the risk-free cate of same matuity.
Required:
1. Estimate the cost of debt for Pear Corporation. (Think: historical spread vs. current spread; Maturity of 1 year vs. Maturity of 30 years; A-rating vs. BBB-rating).
(a) 5.60%
(b) 3.10%
(c) 4.60%
(d) 4.70%
(e) 1.60%

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Exercise 18-15 sheffield appliance center is an experienced home appliance dealer. sheffield appliance center also offers a number of services for the home appliances that it sells. assume that sheffield appliance center sells ovens on a standalone basis. sheffield appliance center also sells installation services and maintenance services for ovens. however, sheffield appliance center does not offer installation or maintenance services to customers who buy ovens from other vendors. pricing for ovens is as follows. oven only $790 oven with installation service 850 oven with maintenance services 970 oven with installation and maintenance services 990 in each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at $180. additionally, the incremental amount charged by sheffield appliance center for installation approximates the amount charged by independent third parties. ovens are sold subject to a general right of return. if a customer purchases an oven with installation and/or maintenance services, in the event sheffield appliance center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds $790. assume that a customer purchases an oven with both installation and maintenance services for $990. (b) indicate the amount of revenue that should be allocated to the oven, the installation, and to the maintenance contract.