EnCana is major gas producing company in north America. This corporation came into existence by the merger of Pan Canadian and Alberta Energy company which is biggest oil and gas producing companies in North America.
Steven and Barb are discussing about the calculation of cost of capital in order to make investments and they are uncertain about the costs which should be consider while calculating the cost of capital. The investment is always made if expected rate of return is greater than its cost of capital.
Cost of Capital
Before calculating the cost of capital I'll calculate cost of equity and cost of dept and capital structure for ENCANA:
1 Cost of Debt:
ENCANA cost of debt included cost on short term debt , long term debt and publicity traded interest amount
1.1 Short term Debt:
Short term obligations (Ex.1) = $ 1425 million
Interest Rate (Ex.1) = 3.52%
Total amount for short term debt interest = 1425 × 3.52% = 50.16 million
1.2 Long term Debt:
Other long term liabilities (Ex.1) = $1278
Interest rate (Prime rate charged) = 5.25%
Total amount for long term debt interest = 1278 × 5.25% = 67.095 million
1.3 Publicity traded:
Publicity traded interest = total interest - (short term debt interest amount + long term debt interest amount)
Publicity traded interest = 524 - ( 50.16 + 67.095) = 406.75 million
Interest rate on publicity traded = Publicity traded interest ÷ L.T debt on publicity traded Interest rate on publicity traded = 406.75 ÷ 5351 = 7.6%
Cost on debt = Weight of long term debt × Rate of interest on L.T debt + Weight of short term debt × Rate of interest on S.T debt + Weight of publicity traded × rate of interest on publicity traded
= 1278/8054* × 5.25 + 1425/8054 × 3.52 + 5351/8054 × 7.60
= 0.833 + 0.622 + 5.049
= 6.5%
*The amount $8054 is total amount of debt given in Exhibit 3
1.4 Determining Tax rate:
Tax rate for