Page 105 - Microsoft Word - 00 P1 IW Prelims.docx
P. 105
The weighted average cost of capital (WACC)
3.3 Calculation of yield – the credit spread method
The credit spread is a measure of the credit risk associated with a company. Credit
spreads are generally calculated by a credit rating agency and presented in a table
like the one below.
The yield (k d) = (Risk free rate + Credit spread)
Example of a table of credit spreads (in basis points)
Rating 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr
AAA 5 9 14 25 38 59
AA 8 13 20 32 50 74
A 10 16 24 37 58 95
BBB 17 28 40 66 90 130
BB 35 50 70 100 140 185
93
