2 To compute the cost of debt for Titan, we added an
estimateddefaultspreadof0.5percent(basedonthesynthetic
ratingofAAforTitan)forTitanandthedefaultspreadfor
Greece as a country of 0.26 percent (based on sovereign
bonds issues by Greece) to the risk-free rate of 3.41 percent.
3 Thecapitalexpendituresinclude theleaseexpensesfrom
this year,and thedepreciationincludesthedepreciation on
theleasedasset.Thenormalizedchangeinnoncashworking
capitalwasestimatedbymultiplyingthechangeinrevenues
in 2004 ($4,814million)bythenoncashworkingcapitalasa
percent of revenues in 2004 (8.46 percent).
4 We valued the options using a dilution-adjusted
Black-Scholes model. We used the average exercise price
acrossalloptions(vestedaswellasnonvested)andhalvedthe
maturity of the options to reflect the likelihood of early
exercise. We will discuss these issues in more detail in
Chapter 11.
5 While thismayseemradical,giventheincreasein debt,
SAP in 10 years will be a mature company with huge
operating income and cash flows.
6 E.I.AltmanandV.Kishore,“TheDefaultExperienceof
U.S. Bonds,” working paper, Salomon Center, New York
University,2000.Thisstudyestimateddefaultratesover 10
yearsforonlysome oftheratingsclasses. Weextrapolated
the rest of the ratings.
7 J.N.Warner,“BankruptcyCosts:SomeEvidence,”Journal
of Finance 32 (1977): 337–347. In this study of railroad