COST OF CAPITAL UPDATE

What the Best Companies Do

November 17th, 2008

To size the impact of higher credit spreads, we conducted a cost of capital analysis for the S&P 500 which revealed the To size the impact of higher credit spreads, we conducted a cost of capital analysis for the S&P 500 which revealed the following: following: (1) The Weighted Average Cost of Capital has risen for the typical company to between 9% and 12%. (1) The Weighted Average Cost of Capital has risen for the typical company to between 9% and 12%. (2) Approximately a 75% debt-equity ratio is correlated with the lowest cost of capital (across all ratings). (2) Approximately a 75% debt-equity ratio is correlated with the lowest cost of capital (across all ratings). Cost of Capital by Credit Rating, 2006-2008 Median WACC, S&P 500
14.0% 12.0% 10.0% WAC C Q 3 2006 8.0% 6.0% 4.0% 2.0% 0.0% AAA AA A BBB BB B WACC Q 3 2007 8.0% 9.0% WACC Q 3 2008 10.0% 11.0%

Cost of Capital by Debt Ratio, 2008 Median WACC, S&P 500

BB or B: 8.9% A: 8.8% BBB: 8.6%

7.0%

6.0%

AA: 5.5%
5.0% 0.20 0.30 0.50 0.75 2.00 3.00

Credit Rating

Debt/Equity Ratio

*WACC values for 2008 are based on data from Bloomberg. WACC values for 2006-2007 are calculated by the Corporate Executive Board based on data from Standard *WACC values for 2008 are based on data from Bloomberg. WACC values for 2006-2007 are calculated by the Corporate Executive Board based on data from Standard and Poors Compustat. Please refer to the next page for more details. and Poors Compustat. Please refer to the next page for more details.
2008 Corporate Executive Board. All Rights Reserved.

COST OF CAPITAL UPDATE

What the Best Companies Do

November 17th, 2008

Note on Methodology Note on Methodology

2008 WACC this value is calculated by Bloomberg with the following formula: 2008 WACC this value is calculated by Bloomberg with the following formula: WACC = (Cost of Equity * Weight of Equity) + (After Tax Cost of Debt * Weight of Debt) + (Cost of Preferred WACC = (Cost of Equity * Weight of Equity) + (After Tax Cost of Debt * Weight of Debt) + (Cost of Preferred Equity * Weight of Preferred Equity), where Equity * Weight of Preferred Equity), where Cost of Equity = Risk Free Rate + Equity Risk Premium Cost of Equity = Risk Free Rate + Equity Risk Premium Bloombergs calculation of the Cost of Debt is based on a Bloomberg Fair Market Sector Curve (FMC) for the Bloombergs calculation of the Cost of Debt is based on a Bloomberg Fair Market Sector Curve (FMC) for the firm: firm: Cost of Debt = ((Short Term Debt * Pre-Tax Cost of Short Term Debt + Long Term Debt * Pre-Tax Cost of Long Cost of Debt = ((Short Term Debt * Pre-Tax Cost of Short Term Debt + Long Term Debt * Pre-Tax Cost of Long Term Debt) / Total Debt))*(1-Tax Rate). Term Debt) / Total Debt))*(1-Tax Rate). If the appropriate FMC curve is not available (or in rare cases when there is a negative Pre-Tax Cost of Short Term If the appropriate FMC curve is not available (or in rare cases when there is a negative Pre-Tax Cost of Short Term Debt or Long Term Debt), Bloomberg uses a rough approximation of pre-tax cost of debt. Debt or Long Term Debt), Bloomberg uses a rough approximation of pre-tax cost of debt. Bloomberg calculates the weights by dividing debt and equity by total capital (common equity, preferred equity, Bloomberg calculates the weights by dividing debt and equity by total capital (common equity, preferred equity, long-term debt, and short-term debt). long-term debt, and short-term debt). 2006-2007 WACC these values are calculated by the Corporate Executive Board using Standard and Poors 2006-2007 WACC these values are calculated by the Corporate Executive Board using Standard and Poors Compustat data with the following formula: Compustat data with the following formula: WACC = (Cost of Equity * Weight of Equity) + (After Tax Cost of Debt * Weight of Debt), where WACC = (Cost of Equity * Weight of Equity) + (After Tax Cost of Debt * Weight of Debt), where Cost of Equity = Risk Free Rate + *Equity Risk Premium Cost of Equity = Risk Free Rate + *Equity Risk Premium Cost of Debt = Pre-Tax cost of Debt. Cost of Debt = Pre-Tax cost of Debt.
2008 Corporate Executive Board. All Rights Reserved.

COST OF CAPITAL UPDATE

What the Best Companies Do

November 17th, 2008

Corporate Finance Division

Quantitative Research Team
Bob Sanders Senior Analyst Jian Chen Project Manager Oleg Polishchuk Project Manager Michael Griffin Managing Director Scott Bohannon General Manager

Professional Services Note

The Quantitative Research Team has worked to ensure the accuracy of the information it provides to the Corporate Executive Board members. This project relies upon data obtained from many sources, however, and the Quantitative Research Team cannot guarantee the accuracy of the information or its analysis in all cases. Furthermore, the Quantitative Research Team is not engaged in rendering legal, accounting, or other professional services. Its projects should not be construed as professional advice on any particular set of facts or circumstances. Members requiring such services are advised to consult an appropriate professional. Neither Corporate Executive Board nor its programs are responsible for any claims or losses that may arise from any errors or omissions in their reports, whether caused by Corporate Executive Board or its sources.

2008 Corporate Executive Board. All Rights Reserved.