PRELIMINARY STUFF AND INPUTS

Objective

Before you start

Inputs

Units
Income inputs

Balance Sheet

Market Data

Tax Rate
Default Spreads

READING THE OUTPUT
Summary

Details

References
Corporate Finance: Theory and Practice, Chapter 18
Applied Corporate Finance: Chapter 8
 PRELIMINARY STUFF AND INPUTS
This spreadsheet allows you to compute the optimal capital structure for a non­financial
service firm
Open preferences in excel, go into calculation options and put a check in the iteration box.
If it is already checked, leave it as is.
The inputs are primarily in the input sheet. If your company has operating leases, 
use the operating lease worksheet to enter your lease or rental commitments.
Enter all numbers in the same units (000s, millions or even billions)
The key income input is the earnings before long term interest expenses and depreciation.
Enter the most updated numbers you have for each (even if they are 12­month trailing
numbers). If the most recent period for which you have data has an operating income that
is abnormal, either because of extraordinary losses/gains or some other occurrence, use
an average operating income over the last few years.
Enter the book value of total debt. If you have a market value enter that 
number. Alternatively, input the average maturity of the debt and I will estimate the
market value of debt. 
Enter the current stock price, the current risk free rate, the equity  risk
premium you would like to use to estimate your cost of equity and the current rating for
your firm. If you do not have a rating, there is an option for you at the very bottom of
the spreadsheet to compute a synthetic rating.
Enter a marginal tax rate, if you can find it. Otherwise, use the marginal tax rate of country
This spreadsheet has interest coverage ratios, ratings and default spreads built into it in
the worksheet. You can choose between two tables, one for large and stable 
firms, and the other for small or risky firms. If you want you can change the interest
coverage ratios and ratings in these tables.
READING THE OUTPUT
The summary provides a picture of your firm's current cost of capital and debt ratio, and 
compares it to your firm's optimal debt ratio and the cost of capital at that level. The
firm value is computed at each debt ratio, based upon how the expected operating income
and the cost of capital. The optimal debt ratio is that ratio at which firm value is
maximized. It might not be the same point at which cost of capital is minimized.
The details of the calculation at each debt ratio are below the summary.

actice, Chapter 18
 Question
Q1: What do I do excel says there are circular references?

Q2: My spreadsheet has gone crazy. I get errors all over.

What did I do wrong?

Q3: I am entering the inputs for my company but the

optimal numbers do not seem to change from the
originals.

Q4: I am getting an optimal debt ratio of 0%. This can't be

right. Can it?

Q5: My cost of capital at my optimal debt ratio is higher

than the current cost of capital. I thought it was supposed
to be lower.

Q6: I am getting an optimal debt ratio at a mix where my cos

of capital is not minimized? Is something wrong?
 Answer
Go into preferences, choose calculation options and make sure the iteration box has a check in it.
I am sorry to say this, but you probably just made an input error. While you might have fixed it,
the iterations in the spreadsheet make it very sensitive and the errors will not go away. The only
fix (Sorry, sorry…) is to copy the inputs into a fresh version of the spreadsheet.

You probably forgot to check the iteration box (see Q1)

Sure. If your operating income is either negative or very low, relative to your firm value,
you can end up at an optimal debt ratio of 0%. For instance, if you have EBIT of 100 on a
firm value of 10000, a 10% debt ratio would probably push you into a C rating and give
you a very high cost of capital.
Generally, you are right. However, I would suggest that you look at three factors:
- If your optimal is just slightly higher or lower than your current debt ratio, it is possible that you
are closer to the optimal than the stated optimal. Let me explain. Assume that you are at a 24% debt ratio
and the optimal comes out to 30%. The true optimal is really somewhere around 30% since
I am constrained to work in 10% increments of the debt ratio. If the true optimal were
26%, your current debt ratio of 24% is closer to the optimal.
- Rating Differences: One of the costs of rating a company based only on the interest
coverage ratio is that the rating might be very different from the actual rating. Thus, your
current cost of capital is based upon your current rating, and the optimal is based upon
the synthetic ratings, and the two don't match, the current and the optimal cost of capital
can be mismatched. You can get around this by switching to a synthetic rating for computing
the current cost of capital (in the input sheet).
- Existing debt at low rates: I assume in the spreadsheet that existing debt gets refinanced at
the new pre-tax cost of debt at each debt ratio. Consequently, if you have a lot of old debt on
your books at much lower rates, the interest expense that I report will be much higher than
your actual interest expense. This, in turn, can affect your interest coverage ratio and rating.
This, too, you can fix by locking in debt at current rates in the input sheet.
Not necessarily. If you chose to build in indirect bankruptcy costs (an option on the input page),
your operating income also changes as your debt ratio changes. Since the objective ultimately is to
maximize firm value, it is possible that the net effect (lower cost of capital is good but it could be offset
by lower operating income) is resulting in an optimal at a higher debt ratio.
Inputs
Please enter the name of the company you are analyzing: Disney

Please enter the date that you are doing this analysis Nov-13

Financial Information
Earnings before interest expenses, depreciation & amortization (EBITDA) $11,642.00

Depreciation and Amortization: $2,192.00

Capital Spending: $5,239.00

Interest expense on debt: $349.00

Marginal tax rate to use for pre-tax cost of debt 36.10%

Current Bond Rating on debt (if available): A2/A

Enter the current pre-tax cost of debt for your company 3.75%
Market Information & information on debt

Number of shares outstanding: 1800

Market price per share: $67.71

Beta of the stock: 1.0013

Cash and marketable securities = $3,931.00

Book value of debt: $ 14,288.00

Can you estimate the market value of the interest bearing debt? No

If so, enter the market value of "interest bearing" debt:

Do you want me to try and estimate market value of debt? Yes

If yes, enter the weighted average maturity of outstanding debt? 7.92

Do you have any operating leases? Yes

Indirect bankruptcy costs & ratings constraints (if any)

Do you want to incorporate indirect bankruptcy costs into your optimal? No

If yes, specify the magnitude of your indirect bankruptcy costs Medium

General Market Data

Current riskfree rate in the currency of analysis = 2.12%

Risk premium (for use in the CAPM) 5.76%

Country Default spread (for cost of debt) 0.00%

General Data

Which spread/ratio table would you like to use for your anlaysis? 1

Do you want to assume that existing debt is refinanced at the 'new' rate? Yes
Do you want the firm's current rating & cost of debt to be adjusted to the synthetic ra Yes
 Output Summary
Current Optimal
Debt to Capital 11.68% 60.00%
Cost of capital 7.17% 6.26%
Enterprise value $134,067 $163,432
Value per share $67.71 $84.02
For details, check "Optimal Capital Structure" worksheet

(Yes or No)
(Yes or No)
Country 2017
Afghanistan 20.00%
Albania 15.00%
Algeria 26.00%
Andorra 10.00%
Angola 30.00%
Anguilla 0.00%
Antigua and Barbuda 25.00%
Argentina 35.00%
Armenia 20.00%
Aruba 25.00%
Australia 30.00%
Austria 25.00%
Azerbaijan 20.00%
Bahamas 0.00%
Bahrain 0.00%
Bangladesh 25.00%
Barbados 25.00%
Belarus 18.00%
Belgium 33.99%
Benin 30.00%
Bermuda 0.00%
Bolivia 25.00%
Bonaire, Saint Eustatius and 25.00%
Bosnia and Herzegovina 10.00%
Botswana 22.00%
Brazil 34.00%
Brunei Darussalam 18.50%
Bulgaria 10.00%
Burkina Faso 27.50%
Burundi 30.00%
Cambodia 20.00%
Cameroon 33.00%
Canada 26.50%
Cayman Islands 0.00%
Chile 25.50%
China 25.00%
Colombia 34.00%
Congo (Democratic Republic of 35.00%
Costa Rica 30.00%
Croatia 20.00%
Curacao 22.00%
Cyprus 12.50%
Czech Republic 19.00%
Denmark 22.00%
Djibouti 25.00%
Dominica 25.00%
Dominican Republic 27.00%
Ecuador 22.00%
Egypt 22.50%
El Salvador 30.00%
Estonia 20.00%
Ethiopia 30.00%
Fiji 20.00%
Finland 20.00%
France 33.33%
Gabon 30.00%
Gambia 31.00%
Georgia 15.00%
Germany 29.79%
Ghana 25.00%
Gibraltar 10.00%
Greece 29.00%
Grenada 30.00%
Guatemala 25.00%
Guernsey 0.00%
Honduras 25.00%
Hong Kong SAR 16.50%
Hungary 9.00%
Iceland 20.00%
India 30.00%
Indonesia 25.00%
Iraq 15.00%
Ireland 12.50%
Isle of Man 0.00%
Israel 24.00%
Italy 24.00%
Ivory Coast 25.00%
Jamaica 25.00%
Japan 30.86%
Jersey 20.00%
Jordan 20.00%
Kazakhstan 20.00%
Kenya 30.00%
Korea, Republic of 22.00%
Kuwait 15.00%
Kyrgyzstan 10.00%
Latvia 15.00%
Lebanon 15.00%
Libya 20.00%
Liechtenstein 12.50%
Lithuania 15.00%
Luxembourg 27.08%
Macau 12.00%
Macedonia 10.00%
Madagascar 20.00%
Malawi 30.00%
Malaysia 24.00%
Malta 35.00%
Mauritius 15.00%
Mexico 30.00%
Moldova 12.00%
Monaco 33.33%
Mongolia 25.00%
Montenegro 9.00%
Morocco 31.00%
Mozambique 32.00%
Myanmar 25.00%
Namibia 32.00%
Netherlands 25.00%
New Zealand 28.00%
Nicaragua 30.00%
Nigeria 30.00%
Norway 24.00%
Oman 15.00%
Pakistan 31.00%
Palestinian Territory 15.00%
Panama 25.00%
Papua New Guinea 30.00%
Paraguay 10.00%
Peru 29.50%
Philippines 30.00%
Poland 19.00%
Portugal 21.00%
Qatar 10.00%
Romania 16.00%
Russia 20.00%
Rwanda 30.00%
Saint Kitts and Nevis 33.00%
Saint Lucia 30.00%
Saint Vincent and the Grenadi 32.50%
Samoa 27.00%
Saudi Arabia 20.00%
Senegal 30.00%
Serbia 15.00%
Sierra Leone 30.00%
Singapore 17.00%
Sint Maarten (Dutch part) 34.50%
Slovakia 21.00%
Slovenia 19.00%
Solomon Islands 30.00%
South Africa 28.00%
Spain 25.00%
Sri Lanka 28.00%
St Maarten 34.50%
Sudan 35.00%
Suriname 36.00%
Swaziland 27.50%
Sweden 22.00%
Switzerland 17.77%
Syria 28.00%
Taiwan 17.00%
Tanzania 30.00%
Thailand 20.00%
Trinidad and Tobago 25.00%
Tunisia 25.00%
Turkey 20.00%
Turkmenistan 20.00%
Turks and Caicos Islands 0.00%
Uganda 30.00%
Ukraine 18.00%
United Arab Emirates 55.00%
United Kingdom 19.00%
United States 24.00%
Uruguay 25.00%
Uzbekistan 7.50%
Vanuatu 0.00%
Venezuela 34.00%
Vietnam 20.00%
Yemen 20.00%
Zambia 35.00%
Zimbabwe 25.00%
Africa average 28.21%
Americas average 25.66%
Asia average 21.28%
EU average 21.51%
Europe average 19.54%
Global average 24.25%
Latin America average 27.98%
North America average 23.75%
Oceania average 28.67%
OECD average 24.07%
South America average 27.98%
 Operating Lease Converter
Operating lease expenses are really financial expenses, and should be treated as such. Accounting standards allow th
be treated as operating expenses. This program will convert commitments to make operating leases into debt and
adjust the operating income accordingly, by adding back the imputed interest expense on this debt.

Inputs
Operating lease expense in current year = $875.00 
Operating Lease Commitments (From footnote to financials)
Year Commitment ! Year 1 is next year, ….
1  $           507.00 
2  $           422.00 
3  $           342.00 
4  $           272.00 
5  $           217.00 
6 and beyond  $        1,784.00 

Pre­tax Cost of Debt = 2.66% ! If you do not have a cost of debt, use the attached ratings estimator

From the current financial statements, enter the following
Reported Operating Income (EBIT) = $9,450.00  ! This is the EBIT reported in the current income statement
Reported Interest Expenses = $349.00 
Output
Number of years embedded in yr 6 estimate = 5 ! I use the average lease expense over the first five years
to estimate the number of years of expenses in yr 6
Converting Operating Leases into debt
Year Commitment Present Value
1  $           507.00  $493.86 
2  $           422.00  $400.41 
3  $           342.00  $316.10 
4  $           272.00  $244.89 
5  $           217.00  $190.31 
6 and beyond  $           356.80  $1,447.05  ! Commitment beyond year 6 converted into an annuity for ten years
Debt Value of leases =  $        3,092.62 

Restated Financials
Operating Income with Operating leases reclassified as debt =  $      10,015.74 
Interest expenses with Operating leases classified as debt =  $           431.26 
Depreciation with operating leases classified as debt = $ 2,501.26
verter
ounting standards allow them to
ng leases into debt and

ent income statement

the first five years
Inputs for synthetic rating estimation
Enter the type of firm = 1 (Enter 1 if large financial service firm, 2 if smaller financial service firm)
Earnings before interest and taxes (EBIT) = $10,015.74  (Add back only long term interest
Current interest expenses = $431.26  (Use only long term interest expen
Current long term government bond rate = 2.12%
Output
Interest  coverage ratio = 23.22
Estimated Bond Rating = Aaa/AAA
Estimated Default Spread = 0.54%
Estimated Cost of Debt = 2.66%

For large manufacturing firms
If interest coverage ratio is
> ≤ to Rating is Spread is Drop in EBITDA
­100000 0.199999 D2/D 18.60% 0.00%
0.2 0.649999 C2/C 13.95% 0.00%
0.65 0.799999 Ca2/CC 10.63% 0.00%
0.8 1.249999 Caa/CCC 8.64% 0.00%
1.25 1.499999 B3/B- 4.37% 0.00%
1.5 1.749999 B2/B 3.57% 0.00%
1.75 1.999999 B1/B+ 2.98% 0.00%
2 2.2499999 Ba2/BB 2.38% 0.00%
2.25 2.49999 Ba1/BB+ 1.98% 0.00%
2.5 2.999999 Baa2/BBB 1.27% 0.00%
3 4.249999 A3/A- 1.13% 0.00%
4.25 5.499999 A2/A 0.99% 0.00%
5.5 6.499999 A1/A+ 0.90% 0.00%
6.5 8.499999 Aa2/AA 0.72% 0.00%
8.50 100000 Aaa/AAA 0.54% 0.00%

For smaller and riskier firms
If interest coverage ratio is
greater than ≤ to Rating is Spread is Drop in EBITDA
­100000 0.499999 D2/D 18.60% 0.00%
0.5 0.799999 C2/C 13.95% 0.00%
0.8 1.249999 Ca2/CC 10.63% 0.00%
1.25 1.499999 Caa/CCC 8.64% 0.00%
1.5 1.999999 B3/B- 4.37% 0.00%
2 2.499999 B2/B 3.57% 0.00%
2.5 2.999999 B1/B+ 2.98% 0.00%
3 3.499999 Ba2/BB 2.38% 0.00%
3.5 3.9999999 Ba1/BB+ 1.98% 0.00%
4 4.499999 Baa2/BBB 1.27% 0.00%
4.5 5.999999 A3/A- 1.13% 0.00%
6 7.499999 A2/A 0.99% 0.00%
 7.5 9.499999 A1/A+ 0.90% 0.00%
9.5 12.499999 Aa2/AA 0.72% 0.00%
12.5 100000 Aaa/AAA 0.54% 0.00%
 cial service firm)
dd back only long term interest expense for financial firms)
se only long term interest expense for financial firms)
 CAPITAL STRUCTURE 17

Disney
November 1, 2013 Drivers of the optimal debt r
Capital Structure Financial Market Income Statement Marginal tax rate =
Current MV of Equity = $121,878  Current Beta for Stock = 1.00 Current EBITDA = $12,517  EBITDA/ Enterprise value =
Market Value of interest­bearing d $13,028  Current Bond Rating = A2/A Current Depreciation = $2,501  EBIT/ Enterprise value =
# of Shares Outstanding = 1800 Summary of Inputs Current Tax Rate = 36.10% Unlevered beta =
Debt Value of Operating leases = $3,093  Long Term Government Bond  2.12% Current Capital Spending= $5,239 
Equity Risk Premium = 5.76% Pre­tax cost of debt = 3.75% Current Interest Expense = $431 

RESULTS FROM ANALYSIS
Current Optimal Change
D/(D+E) Ratio = 11.68% 60.00% 48.32%
Implied Growth Rate Calculation
Beta for the  Stock = 1.001263852 1.81 0.81 Enterprise value = $134,067 
Cost of Equity    = 7.89% 12.54% 4.65% Current WACC = 7.17%
Rating on Debt A2/A Current FCFF = $3,662.32  ! I am ignoring working capital
After­tax cost of Debt = 1.70% 2.07% 0.37% Implied Growth Rate  4.32%
If this number is >your riskfree rate, I use the riskfree rate as a perpetual gr
WACC 7.17% 6.26% ­0.91%
Implied Growth Rate = 2.12%
Assumes perpeutal growth Enterprise value  $134,067  $163,432  $29,365 
Value/share (Perpetual Growth $67.71  $84.02  $16.31 

We use the following default spreads in our analysis. Change them in the input sheet if necessary: Ratings comparison at current debt ratio
Rating Coverage gt and lt Spread Drop in EBITDACurrent Interest coverage ratio = 23.22
AAA 8.5 100000 0.54% 0.00% Rating based upon coverage = Aaa/AAA
AA 6.5 8.499999 0.72% 0.00% Interest rate based upon coverage = 2.66%
A+ 5.5 6.499999 0.90% 0.00% Current rating for company = A2/A
A 4.25 5.499999 0.99% 0.00% Current interest rate on debt = 3.75%
A­ 3 4.249999 1.13% 0.00% Drop in operating income based on current rating 0.00%
BBB 2.5 2.999999 1.27% 0.00%
BB 2 2.2499999 2.38% 0.00%
B+ 1.75 1.999999 2.98% 0.00%
B 1.5 1.749999 3.57% 0.00%
B­ 1.25 1.499999 4.37% 0.00%
 CAPITAL STRUCTURE 18

CCC 0.8 1.249999 8.64% 0.00%

CC 0.65 0.799999 10.63% 0.00%
C 0.2 0.649999 13.95% 0.00%
D ­100000 0.199999 18.60% 0.00%
 CAPITAL STRUCTURE 19

Current beta= 1.00 Current Equity= $121,878  Current Depreciation= $2,501 

Current  Debt= $16,120  Current EBITDA= $12,517  Current Interest rate (Company)= 2.66%
Tax rate= 36.10% Current Rating= A2/A Current T.Bond rate= 2.12%
Enterprise value = $134,067  Adjusted EBITDA = $12,517 
WORKSHEET FOR ESTIMATING RATINGS/INTEREST RATES
D/(D+E) 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00%
D/E 0.00% 11.11% 25.00% 42.86% 66.67% 100.00% 150.00% 233.33% 400.00% 900.00%
$ Debt $0  $13,800  $27,600  $41,400  $55,199  $68,999  $82,799  $96,599  $110,399  $124,199 
Beta 0.9232 0.99 1.07 1.18 1.32 1.51 1.81 2.33 3.49 7.73
Cost of Equity 7.44% 7.82% 8.29% 8.90% 9.71% 10.84% 12.54% 15.53% 22.24% 46.64%
% Drop in EBITD 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
EBITDA $12,517  $12,517  $12,517  $12,517  $12,517  $12,517  $12,517  $12,517  $12,517  $12,517 
Depreciation $2,501  $2,501  $2,501  $2,501  $2,501  $2,501  $2,501  $2,501  $2,501  $2,501 
EBIT $10,016  $10,016  $10,016  $10,016  $10,016  $10,016  $10,016  $10,016  $10,016  $10,016 
Interest $0  $367  $734  $1,101  $1,667  $2,146  $2,687  $10,391  $11,875  $19,961 
Taxable Income $10,016  $9,649  $9,282  $8,915  $8,349  $7,870  $7,329  ($375) ($1,860) ($9,945)
Tax $3,616  $3,483  $3,351  $3,218  $3,014  $2,841  $2,646  ($135) ($671) ($3,590)
Net Income $6,400  $6,165  $5,931  $5,696  $5,335  $5,029  $4,683  ($240) ($1,188) ($6,355)
(+)Deprec'n $2,501  $2,501  $2,501  $2,501  $2,501  $2,501  $2,501  $2,501  $2,501  $2,501 
Funds from Op. $8,901  $8,667  $8,432  $8,198  $7,836  $7,530  $7,184  $2,261  $1,313  ($3,854)

Pre­tax Int. cov ∞ 27.29 13.64 9.10 6.01 4.67 3.73 0.96 0.84 0.50
Funds/Debt ∞ 0.63 0.31 0.20 0.14 0.11 0.09 0.02 0.01 ­0.03
Likely Rating Aaa/AAA Aaa/AAA Aaa/AAA Aaa/AAA A1/A+ A2/A A3/A­ Caa/CCC Caa/CCC C2/C
Pre­tax cost of deb 2.66% 2.66% 2.66% 2.66% 3.02% 3.11% 3.25% 10.76% 10.76% 16.07%
Tax rate 36.10% 36.10% 36.10% 36.10% 36.10% 36.10% 36.10% 34.80% 30.45% 18.11%
COST OF CAPITAL CALCULATIONS
D/(D+E) 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00%
D/E 0.00% 11.11% 25.00% 42.86% 66.67% 100.00% 150.00% 233.33% 400.00% 900.00%
$ Debt $0  $13,800  $27,600  $41,400  $55,199  $68,999  $82,799  $96,599  $110,399  $124,199 
Cost of equity 7.44% 7.82% 8.29% 8.90% 9.71% 10.84% 12.54% 15.53% 22.24% 46.64%
Cost of debt 1.70% 1.70% 1.70% 1.70% 1.93% 1.99% 2.07% 7.01% 7.48% 13.16%
Cost of Capital 7.44% 7.21% 6.97% 6.74% 6.60% 6.41% 6.26% 9.57% 10.43% 16.51%
0 0 0 0 0 0 1 0 0 0
Value (perpetual g $127,176  $133,030  $139,448  $146,517  $151,167  $157,587  $163,432  $90,812  $81,377  $47,015 
 CAPITAL STRUCTURE 20

Interest cov Interest cov RATING Interest rate Drop in

 CAPITAL STRUCTURE 21

Low High EBITDA

­100000 0.199999 D2/D 20.72% 0.00%
0.2 0.649999 C2/C 16.07% 0.00%
0.65 0.799999 Ca2/CC 12.75% 0.00%
0.8 1.249999 Caa/CCC 10.76% 0.00%
1.25 1.499999 B3/B­ 6.49% 0.00%
1.5 1.749999 B2/B 5.69% 0.00%
1.75 1.999999 B1/B+ 5.10% 0.00%
2 2.2499999 Ba2/BB 4.50% 0.00%
2.25 2.49999 Ba1/BB+ 4.10% 0.00%
2.5 2.999999 Baa2/BBB 3.39% 0.00%
3 4.249999 A3/A­ 3.25% 0.00%
4.25 5.499999 A2/A 3.11% 0.00%
5.5 6.499999 A1/A+ 3.02% 0.00%
6.5 8.499999 Aa2/AA 2.84% 0.00%
8.5 100000 Aaa/AAA 2.66% 0.00%
 CAPITAL STRUCTURE 22

Drivers of the optimal debt ratio
Marginal tax rate = 36.10%
EBITDA/ Enterprise value = 9.34%
EBIT/ Enterprise value = 7.47%
Unlevered beta = 0.9232

! I am ignoring working capital

 use the riskfree rate as a perpetual growth rate.
Stock price buyback effect
Current Stock price = $67.71
# Shares outstanding before buyback 1800.00
Expected buyback price = $67.71 Enter this number

Current Debt = $16,120

Debt at Optimal = $82,799
New Debt issued = $66,679
# Shares bought back = 984.767679
Shares outstanding after buyback = 815.23

Enterprise value after buyback = $163,432

+ Cash 3931
- Debt $82,799.07
Equity value after buyback $84,563.89
/ Number of shares after buyback 815.23
Value per share for remaining shares $103.73
 Enterprise Value
$180,000

$160,000

$140,000

$120,000

$100,000

$80,000

$60,000

$40,000

$20,000

$0
Debt Ratio
Debt Ratio Beta Cost of Equity Bond Rating Interest rate on debt Tax Rate
0% 0.9232 7.44% Aaa/AAA 2.66% 36.10%
10% 0.9888 7.82% Aaa/AAA 2.66% 36.10%
20% 1.0707 8.29% Aaa/AAA 2.66% 36.10%
30% 1.1761 8.90% Aaa/AAA 2.66% 36.10%
40% 1.3165 9.71% A1/A+ 3.02% 36.10%
50% 1.5132 10.84% A2/A 3.11% 36.10%
60% 1.8082 12.54% A3/A­ 3.25% 36.10%
70% 2.3279 15.53% Caa/CCC 10.76% 34.80%
80% 3.4918 22.24% Caa/CCC 10.76% 30.45%
90% 7.7272 46.64% C2/C 16.07% 18.11%

Debt Ratio $ Debt Interest Expense

Interest Coverage RatioBond Rating Pre­tax cost of d
0% $0  $0  ∞ Aaa/AAA 2.66%
10% $13,800  $367  27.29 Aaa/AAA 2.66%
20% $27,600  $734  13.64 Aaa/AAA 2.66%
30% $41,400  $1,101  9.10 Aaa/AAA 2.66%
40% $55,199  $1,667  6.01 A1/A+ 3.02%
50% $68,999  $2,146  4.67 A2/A 3.11%
60% $82,799  $2,687  3.73 A3/A­ 3.25%
70% $96,599  $10,391  0.96 Caa/CCC 10.76%
80% $110,399  $11,875  0.84 Caa/CCC 10.76%
90% $124,199  $19,961  0.50 C2/C 16.07%
Cost of Debt (after­tax) WACC Enterprise Value
1.70% 7.44% $127,176 
1.70% 7.21% $133,030 
1.70% 6.97% $139,448 
1.70% 6.74% $146,517 
1.93% 6.60% $151,167 
1.99% 6.41% $157,587 
2.07% 6.26% $163,432 
7.01% 9.57% $90,812 
7.48% 10.43% $81,377 
13.16% 16.51% $47,015 

Tax rate After­tax cost of debt
36.10% 1.70%
36.10% 1.70%
36.10% 1.70%
36.10% 1.70%
36.10% 1.93%
36.10% 1.99%
36.10% 2.07%
34.80% 7.01%
30.45% 7.48%
18.11% 13.16%
 Rating is Yes/No IBC
Aaa/AAA Yes High
Aa2/AA No Medium
A1/A+ Low
A2/A
A3/A-
Baa2/BBB
Ba1/BB+
Ba2/BB
B1/B+
B2/B
B3/B-
Caa/CCC
Ca2/CC
C2/C
D2/D
Not rated

Rating is Low IBC Medium High IBC

D2/D -30% -50.00% -100%
Caa/CCC -25% -40.00% -50%
Ca2/CC -25% -40.00% -50%
C2/C -25% -40.00% -50%
B3/B- -15% -25.00% -30%
B2/B -10% -20.00% -25%
B1/B+ -10% -20.00% -25%
Ba2/BB -10% -20.00% -25%
Ba1/BB+ -10% -20.00% -25%
Baa2/BBB -5% -10.00% -15%
A3/A- 0.00% -2.00% -5%
A2/A 0.00% 0.00% -2%
A1/A+ 0.00% 0.00% 0%
Aa2/AA 0.00% 0.00% 0%
Aaa/AAA 0% 0.00% 0%
Type of firm
1
2