Notes on $Debt: Use firm value ($78.4 bn) times B/V ratio. Can you do the 30% level? B/(B+S) 10% 30% B/S 11% 43% $ Debt $7,842 $23,526 EBIT $6,153 Interest Interest Coverage Likely Rating Pre-tax cost of debt After-tax cost of debt Cost of Capital The chain effect: 1. more debt 2. interest payment higher 3. lowers your interest coverage ratio, 4. lowers credit rating 5. increases your interest rate. You need to find an interest rate that matches the resulting coverage ratio and the rating. (Trial and error.) Notes on $Debt: Use firm value ($78.4 bn) times B/V ratio.

Table 2 Estimating cost of debt D/(D+E) 0% 10% 20% 30% 40% 50% 60% D/E 11% 25% 43% 67% 100% 150% $ Debt $0 $7,842 $15,684 $23,526 $31,368 $39,210 $47,051 EBIT $6,153 Interest 0.0 372.5 799.9 1270.4 2007.5 4077.8 6775.4 Interest Coverage ∞ 16.52 7.69 4.84 3.06 1.51 0.91 Likely Rating AAA A BBB+ BB+ B- CC Pre-tax cost of debt 4.75% 5.10% 5.40% 6.40% 10.40% 14.40% After-tax cost of debt 3.09% 3.32% 3.51% 4.16% 6.76% 9.36%