# Finance and Short Term Debt

**Topics:**Finance, Weighted average cost of capital, Interest

**Pages:**3 (701 words)

**Published:**March 23, 2013

Before calculating the cost of capital I'll calculate cost of equity and cost of dept and capital structure for ENCANA: 1 Cost of Debt:

ENCANA cost of debt included cost on short term debt , long term debt and publicity traded interest amount 1.1 Short term Debt:

Short term obligations (Ex.1) = $ 1425 million

Interest Rate (Ex.1) = 3.52%

Total amount for short term debt interest = 1425 × 3.52% = 50.16 million 1.2 Long term Debt:

Other long term liabilities (Ex.1) = $1278

Interest rate (Prime rate charged) = 5.25%

Total amount for long term debt interest = 1278 × 5.25% = 67.095 million 1.3 Publicity traded:

Publicity traded interest = total interest - (short term debt interest amount + long term debt interest amount) Publicity traded interest = 524 - ( 50.16 + 67.095) = 406.75 million Interest rate on publicity traded = Publicity traded interest ÷ L.T debt on publicity traded Interest rate on publicity traded = 406.75 ÷ 5351 = 7.6%

Cost on debt = Weight of long term debt × Rate of interest on L.T debt + Weight of short term debt × Rate of interest on S.T debt + Weight of publicity traded × rate of interest on publicity traded = 1278/8054* × 5.25 + 1425/8054 × 3.52 + 5351/8054 × 7.60 = 0.833 + 0.622 + 5.049

= 6.5%

*The amount $8054 is total amount of debt given in Exhibit 3 1.4 Determining Tax rate:

Tax rate for ENCANA can be determined as follow:

Tax Rate= T= Net earnings before interest and tax ÷ tax expense T= 1260 ÷ 4089 = 30.81%

1.5 Cost of debt after tax:

Cost of debt after tax = cost of debt before tax (1- Tax Rate) Cost of debt after tax = 6.5% ( 1- 30.81%) = 4.5 % ==> rate of debt (rd) 2 Cost of equity:

There are following two ways to calculate ENCANA's cost of equity : 1. Using SML equation

2. Calculating cost of equity by dividend growth model

2.1 Calculation of cost of equity for ENCANA by using SML equation: rs = r* + MRP (b)

r* = 4.20 % (Govt. long Term Treasury Bills)...

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