Question

Corporate Tax Rate = 30%



Market Risk Premium = 6%



Beta = 6.0% (

NO NEED to Unlever Beta)



Risk-Free Rate = 3.16% (2009) and 3.69% (2010)



Years to Maturity for 2032 Bond = 22 years (hence 44 coupon payments when

computing 2009 WACC; 42 coupon payments when computing the 2010 WACC)



Years to Maturity for 2011 Bond = 3.5 years (hence 7 coupon payments when computing

the 2009 WACC; 5 coupon payments when computing the 2010 WACC).



Corporate Tax Rate = 30%



Market Risk Premium = 6%



Beta = 6.0% (

NO NEED to Unlever Beta)



Risk-Free Rate = 3.16% (2009) and 3.69% (2010)



Years to Maturity for 2032 Bond = 22 years (hence 44 coupon payments when

computing 2009 WACC; 42 coupon payments when computing the 2010 WACC)



Years to Maturity for 2011 Bond = 3.5 years (hence 7 coupon payments when computing

the 2009 WACC; 5 coupon payments when computing the 2010 WACC).



2010

Total equity = 1,948,496,000

Total Debt = 4,559,152,000

Total = 6,507,648,000

Weight of Equity = 1,948,496,000/6,507,648,000 = 0.2994 = 0.3

Weight of Debt = 1-0.3 = 0.7

What is the cost of debt and cost of equity in 2010?

Answer 1

Cost of Equity in 2010 = risk free rate in 2010 + beta * market risk premium

Risk free rate in 2010 = 3.69%

beta = 6.0 (Beta is a number and not a percentage)

market risk premium = 6.0%

Cost of equity = 3.69% + 6 *6.0 = 39.69%

Note: for calculating cost of debt, we need the coupon rate, the price of the bond, years to maturity and the face value of the bond We have been given only years to maturity and hence we need the other data also to calculate the cost of debt