Aig Case

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Question5A: What is the WACC for your firm?

• 6.75

Question5B: What is the capital structure for your firm?

• Equity: 35.01%

• Debt: 64.99%

• Preferred Stock: 0%

Question 5C: Comment on the capital structure of the firm. Is the firm primarily funded with debt or equity and why?

• AIG is primarily funded with debt; one of the main reasons is because of the recent bailout made by the Federal Reserve Bank. AIG began payment of $130 billion as of January 2011.

Question 5D: What beta did Bloomberg use to calculate the cost of equity? Does this beta equal the beta you calculated in Question 4 part a? If not, why might that be the case?

• The beta is 1.42 which is different from question 4 part a. The reason being is Bloomberg uses different calculations. Bloomberg calculates beta using CAPM while excel uses covariance and variance functions.

Question 5E: What we called in class the market risk-premium or the excess return of the market, Bloomberg calls the Country Premium. What is the Country Premium for your firm?

• The country premium for AIG is 8.99%

Question 5F: Where did Bloomberg get the risk-free rate that it used to calculate the cost of equity? What was the risk-free rate? Is this a reasonable proxy for the risk-free rate?

• The default value for the risk-free rate is the country’s long-term bond rate (10 year). The risk free rate is 2.09%. Any amount of risk would not be tolerated unless the expected rate of return was greater than the risk free rate. Since the expected return is 11.08% then the risk-free rate is a reasonable proxy.

Question 5G: What tax rate did Bloomberg use in the cost of debt calculation? Exactly how was this rate calculated?

• Bloomberg used 36.32% for the cost of debt calculation

• The cost of Debt = [[(SD/TD)*(CS*AF)] +[(LD/TD)*(CL*AF)]]*[1-TR]

• Weighted average cost of debt for the security, calculated using government bond rates, a debt...