1. 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.

2. 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%