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- Topic: level 2 emeriging market Cost of debt
| Author | Topic: level 2 emeriging market Cost of debt |
|---|---|
| quinn21 @2010-05-24 03:46:04 |
hey there, this is my first question i ever post, usually i try to get it done myself :o) but im stuck & searched the internet, study notes and cfa books without a getting a clue. maybe someone of you can help me? Here is the Question from a question bank (dont ask me about the right answer - it just was a lucky guess :o) Assume for this question only that the cost of equity is 25.4% and the local risk-free rate is 15%. Plicher’s weighted average cost of capital is closest to: A) 15.67%. B) 10.15%. C) 18.64%. Your answer: A was correct! The weighted average cost of capital equals (equity / assets) × cost of equity + (debt / assets) × after-tax cost of debt. We have equity, assets, debt, and cost of equity values. To calculate the cost of debt, we start with the local risk-free rate plus the U.S. credit spread on comparable debt, or 15% + 1.3% = 16.3%. Then we multiply 16.3% by (1 – marginal tax rate). 16.3% × 70% = 11.41%. I am Wondering about the 15%? I cant get this number? The local Risk Free Rate is 8,3 %. so I am missing out the 6,7% to get to 15%. Here is whats given: The U.S. risk-free rate is 4%. The U.S. market-risk premium is 6.5%. The global market-risk premium is 9%. The Llaho inflation rate is 25%. The U.S. inflation rate is 3.5%. 10-year Treasury bonds yield 2.5% more than T-bills. The Llahoan government’s short-term bills pay a yield of 8.3%. Plicher’s marginal tax rate is 30%. Plicher’s equity value is $85.2 million. Plicher’s revenue estimate for the next 12 months is $146 million. Plicher’s assets are valued at $279.5 million. Plicher’s debt rating is A-, and its debt is valued at $194.3 million. On average, 10-year U.S. corporate bonds with rating of A- yield 1.3 % higher than a 10-year U.S. Treasury bond. On average, 10-year Plicher corporate bonds with a rating of A- yield 5.6% more than a 10-year U.S. Treasury bond. Worldwide, companies in Plicher’s industry typically have a beta of 1.6. Based on Plicher’s stock returns over the last five years, its beta is 3.4. |
