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Submitted by: Amandeep Arora (1441665), Abhineet Kansal (), Avrojit Roy (), Maaz Gabbur ()
Cost of Debt
It is referred as the effective rate that a company pays on its current debt. This can be measured in either
before- or after-tax returns; however, because interest expense is deductible, the after-tax cost is seen
most often. This is one part of the company's capital structure, which also includes the cost of equity.
Cost of Equity
Cost of equity refers to a shareholder's required rate of return on an equity investment. It is the rate of
return that could have been earned by putting the same money into a different investment with equal
risk.
rE,t rrf,t
rm rrf
Market Risk Premium
As assumed in calculation of debt cost, risk free rate for 10 years time horizon is 3.61%. The beta for the
Lears stock is calculated by using regression analysis of the weekly returns of NYSE composite index and
Lears stock that is traded on NYSE. Beta is the value of coefficient of X in regression output.
Alternate way: Beta can also be calculated using a slope function.
Beta = =SLOPE(H4:H159,E4:E159)
where values in column H represents weekly returns on Lears stock and values in column E represents
weekly returns on NYSE Composite Index.
Appendix
Regression output for calculation of Beta
SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.698937847
R Square
Adjusted R
Square
Standard
Error
Observatio
ns
0.488514115
0.485192778
0.023964556
156
ANOVA
df
SS
Regression
Residual
Total
1 0.084470087
0.08447009
154 0.088442188
155 0.172912275
0.0005743
Coefficients
Intercept
X Variable
1
MS
Standard
Error
0.002942323 0.001931585
1.463610792 0.120682281
t Stat
1.52326891
12.1278018
Significance
F
147.083577 3.4702E-24
P-value
0.12974229
3.4702E-24
Lower 95%
-0.0008735
1.22520439
Upper 95%
0.00675815
1.70201719
Lower
95.0%
-0.0008735
1.22520439
Upper
95.0%
0.00675815
1.70201719
Beta
Cost of Debt
Alternate calculation:
3.61%
2.25%
Cost of debt
2.55%
3.04%
3.61%
5
10
2.34%
3.61%
4.59%
5.86%
Cost of Debt
2013
Total interest
incurred
68.4
1057.1
264.275
792.825
Cost of debt
8.63%
6.04%
Cost of equity
Beta for Lear
1.463610792
Risk
rate
0.30%
0.79%
1.36%
2.34%
3.61%
Cost
equity
9.81%
10.30%
10.87%
11.85%
13.12%
of
Cost of debt
Cost
equity
of
WACC
2.55%
9.81%
8.31%
3.04%
10.30%
8.80%
3.61%
10.87%
9.37%
4.59%
11.85%
10.35%
10
5.86%
13.12%
11.62%