defaultspreadforA-ratedbondsis1%.Addingthis
spreadontotherisk-freerateof4.50%atthetimeof
theanalysisyieldsa pretaxcost ofdebtof 5.50%.
Usingamarginaltaxrateof40%forthefirmgives
us an after-tax cost of debt of 3.30%.- ForEmbraer,weadoptedasimilarapproach.Using
theoperatingincomeof1.74billionrealsandinterest
expensesof 476 millionrealsin2004,wecomputed
an interest coverage ratio of 3.66. The resulting
synthetic rating (from Table 2.4) is BB+ and the
defaultspreadis2%.Theonlyremainingquestionis
whetherweshouldadd onallor onlysome ofthe
Brazilian countrydefault spread of 3.50% that we
estimatedearlierinthechapter.Aswiththecostof
equity, we will assume that the lambda of 0.27
measuresexposuretodebtriskaswell.Thecostof
debtin U.S.dollar termsforEmbraer iscomputed
here, assuming the marginal tax rate of 34% that
applies to Brazil:
As with the cost of equity, this can be converted into a
nominalBRafter-taxcostofdebtusingtheexpectedinflation
rate of 8% for Brazil and 2% for the United States.