AuthorTopic: 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%. Plicherís 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 Ė 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 governmentís short-term bills pay a yield of 8.3%.
Plicherís marginal tax rate is 30%.
Plicherís equity value is $85.2 million.
Plicherís revenue estimate for the next 12 months is $146 million.
Plicherís assets are valued at $279.5 million.
Plicherís 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 Plicherís industry typically have a beta of 1.6.
Based on Plicherís stock returns over the last five years, its beta is 3.4.

CFA Discussion Topic: level 2 emeriging market Cost of debt

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I just wanted to share the good news that I passed CFA Level I!!! Thank you for your help - I think the online question bank helped cut the clutter and made a positive difference.
Edward Liu

Edward Liu