Input Page

Inputs for debt computation

Interest bearing Debt & income statement information
Book value of interest-bearing debt = $10,788.00
Interest expense for most recent year = $606.00
Weighted average maturity of debt = 14.82 ! If you cannot get it, enter zero.
Operating income (Earnings before interest & t $6,661.00
Lease commitments (if any)
Do you have lease commitments? Yes
If you do, please enter the commitments below
Operating lease expense (most recent year) = $823.00
Lease commitment in year 1 = $800.00
Lease commitment in year 2 = $746.00
Lease commitment in year 3 = $682.00
Lease commitment in year 4 = $637.00
Lease commitment in year 5 = $557.00
Lease commitments beyond year 5 = $4,577.00

Cost of debt inputs

Do you want to input your pre-tax cost of debt? Yes
If yes, please enter the pre-tax cost of debt 3.23% (If you have a rating for the company, you can estimate this number by look
If no, you can compute a synthetic rating
Enter type of firm 1 (Enter 1 if large manufacturing firm, 2 if smaller or riskier firm, 3 if financial s

Macro information
Riskfree rate = 1.93% (Long term and default free)
Country default spread (if any) = 0.00% (If your company is from a non AAA rated country, enter the default spread

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 Input Page

ou can estimate this number by looking at the synthetic ratings page for default spreads)

smaller or riskier firm, 3 if financial service firm) Small < $5 billion

ed country, enter the default spread for country)

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 Synthetic rating

Inputs for synthetic rating estimation

Please read the special cases worksheet (see below) before you use this spreadsheet.
Before you use this spreadsheet, make sure that the iteration box (under calculation options in excel) is checked.
Enter the type of firm = 1 (Enter 1 if large manufacturing firm, 2 if smaller or riskier firm, 3 if Small: <$5 billion
Do you have any operating lease or rental commitments? Yes
Enter current Earnings before interest and taxes (EBIT) = 6661 (Add back only long term interest expense for financial f
Enter current interest expenses = 606 (Use only long term interest expense for financial firms)
Enter current long term government bond rate = 1.93%
Output
Interest coverage ratio = 8.98
Estimated Bond Rating = AAA Note: If you get REF! All over the place, set the operating lease comm
Estimated Default Spread = 0.40% to No, and then reset it to Yes. It should work.
Estimated Cost of Debt = 2.33%

If you want to update the spreads listed below, please visit http://www.bondsonline.com
For large manufacturing firms For financial service firms (default spreads are slighty different)
If interest coverage ratio is If long term interest coverage ratio is
> ≤ to Rating is Spread is greater than ≤ to Rating is Spread is
-100000 0.199999 D 12.00% -100000 0.049999 D 12.00%
0.2 0.649999 C 10.50% 0.05 0.099999 C 10.50%
0.65 0.799999 CC 9.50% 0.1 0.199999 CC 9.50%
0.8 1.249999 CCC 8.75% 0.2 0.299999 CCC 8.75%
1.25 1.499999 B- 7.25% 0.3 0.399999 B- 7.25%
1.5 1.749999 B 6.50% 0.4 0.499999 B 6.50%
1.75 1.999999 B+ 5.50% 0.5 0.599999 B+ 5.50%
2 2.2499999 BB 4.00% 0.6 0.749999 BB 4.00%
2.25 2.49999 BB+ 3.00% 0.75 0.899999 BB+ 3.00%
2.5 2.999999 BBB 2.00% 0.9 1.199999 BBB 2.00%
3 4.249999 A- 1.30% 1.2 1.49999 A- 1.30%
4.25 5.499999 A 1.00% 1.5 1.99999 A 1.00%
5.5 6.499999 A+ 0.85% 2 2.49999 A+ 0.85%
6.5 8.499999 AA 0.70% 2.5 2.99999 AA 0.70%
8.50 100000 AAA 0.40% 3 100000 AAA 0.40%

For smaller and riskier firms

If interest coverage ratio is
greater than ≤ to Rating is Spread is
-100000 0.499999 D 12.00%
0.5 0.799999 C 10.50%
0.8 1.249999 CC 9.50%
1.25 1.499999 CCC 8.75%
1.5 1.999999 B- 7.25%
2 2.499999 B 6.50%
2.5 2.999999 B+ 5.50%
3 3.499999 BB 4.00%
3.5 3.9999999 BB+ 3.00%
4 4.499999 BBB 2.00%
4.5 5.999999 A- 1.30%

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 Synthetic rating

6 7.499999 A 1.00%
7.5 9.499999 A+ 0.85%
9.5 12.499999 AA 0.70%
12.5 100000 AAA 0.40%

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 Synthetic rating

eadsheet.
ns in excel) is checked.
Small: <$5 billion

nterest expense for financial firms)

t expense for financial firms)

set the operating lease commitment question in cell F5

eads are slighty different)

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 Operating Leases

Operating lease inputs

Operating lease expense in current year = $ 823.00
Operating Lease Commitments (From footnote to financials)
Year Commitment ! Year 1 is next year, ….
1 $ 800.00
2 $ 746.00
3 $ 682.00
4 $ 637.00
5 $ 557.00
6 and beyond $ 4,577.00

Pre-tax Cost of Debt = 3.23% ! If you do not have a cost of debt, use the attached ratings estimator

From the current financial statements, enter the following

Reported Operating Income (EBIT) = $ 6,661.00 ! This is the EBIT reported in the current income statement
Reported Debt = $13,783.65 ! This is the interest-bearing debt reported on the balance sheet
Reported Interest Expenses = $ 606.00
Output
Number of years embedded in yr 6 estima 7 ! I use the average lease expense over the first five years
to estimate the number of years of expenses in yr 6
Converting Operating Leases into debt
Year Commitment Present Value
1 $ 800.00 $ 774.97
2 $ 746.00 $ 700.05
3 $ 682.00 $ 619.96
4 $ 637.00 $ 560.94
5 $ 557.00 $ 475.14
6 and beyond $ 653.86 $ 3,445.12 ! Commitment beyond year 6 converted into an annuity for ten years
Debt Value of leases = $ 6,576.19

Restated Financials
Operating Income with Operating leases reclassified as debt = $ 6,873.41 (Uses short cut)
Debt with Operating leases reclassified as debt = $20,359.84

Full Operating lease adjustment

Reported Operating income = $6,661.00
+ Current year's operating lease expense $823.00
- Depreciation on leased asset = $548.02
Adjusted Operating Income $6,935.98

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 MV of Debt

Start with interest bearing debt

Book value of debt $10,788.00
Interest expense 606
Average maturity 14.82
Pre-tax cost of debt 3.23%
Book interest rate 5.62%
Estimated market value of interest bearing $13,783.65

If there are operating lease commitments

PV of operating lease commitments = $6,576.19
Market value of all debt = $20,359.84

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 Weighted maturity of debt

Due in Number of yeAmount due Weight

2013 1 1309 12.14%
2016 4 3069 28.47%
2020 8 499 4.63%
2021 9 998 9.26%
2036 24 2961 27.47%
2040 28 499 4.63%
2041 29 996 9.24%
2055 43 449 4.17%
Total 14.82 10780 100.00%

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Weighted maturity of debt

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 Input choices

Yes 1
No 2
3

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