[XLS]Capital Structure - New York University Stern School of …adamodar/pc/capstru.xls · Web viewSheet1 Input choices page Summary Table ValueChart Repurchase price Worksheet Optimal

PRELIMINARY STUFF AND INPUTSObjective

Before you start

Inputs

UnitsIncome inputs

Balance Sheet

Market Data

Tax RateDefault Spreads

READING THE OUTPUTSummary

Details

ReferencesCorporate Finance: Theory and Practice, Chapter 18Applied Corporate Finance: Chapter 8

PRELIMINARY STUFF AND INPUTSThis spreadsheet allows you to compute the optimal capital structure for a non-financialservice firmOpen preferences in excel, go into calculation options and put a check in the iteration box.If it is already checked, leave it as is.The inputs are primarily in the input sheet. If your company has operating leases, use the operating lease worksheet to enter your lease or rental commitments.Enter all numbers in the same units (000s, millions or even billions)

Enter the most updated numbers you have for each (even if they are 12-month trailingnumbers). If the most recent period for which you have data has an operating income thatis abnormal, either because of extraordinary losses/gains or some other occurrence, usean average operating income over the last few years.

number. Alternatively, input the average maturity of the debt and I will estimate themarket value of debt. Enter the current stock price, the current risk free rate, the equity riskpremium you would like to use to estimate your cost of equity and the current rating foryour firm. If you do not have a rating, there is an option for you at the very bottom ofthe spreadsheet to compute a synthetic rating.Enter a marginal tax rate, if you can find it. Otherwise, use the marginal tax rate of countryThis spreadsheet has interest coverage ratios, ratings and default spreads built into it inthe worksheet. You can choose between two tables, one for large and stable firms, and the other for small or risky firms. If you want you can change the interestcoverage ratios and ratings in these tables.

READING THE OUTPUTThe summary provides a picture of your firm's current cost of capital and debt ratio, and compares it to your firm's optimal debt ratio and the cost of capital at that level. Thefirm value is computed at each debt ratio, based upon how the expected operating incomeand the cost of capital. The optimal debt ratio is that ratio at which firm value ismaximized. It might not be the same point at which cost of capital is minimized.The details of the calculation at each debt ratio are below the summary.

Corporate Finance: Theory and Practice, Chapter 18

The key income input is the earnings before long term interest expenses and depreciation.

Enter the book value of total debt. If you have a market value enter that

PRELIMINARY STUFF AND INPUTS

QuestionQ1: What do I do excel says there are circular references?

Q5: My cost of capital at my optimal debt ratio is higherthan the current cost of capital. I thought it was supposedto be lower.

Q6: I am getting an optimal debt ratio at a mix where my cosof capital is not minimized? Is something wrong?

Q2: My spreadsheet has gone crazy. I get errors all over. What did I do wrong?

Q3: I am entering the inputs for my company but the optimal numbers do not seem to change from the originals.

Q4: I am getting an optimal debt ratio of 0%. This can't be right. Can it?

AnswerGo into preferences, choose calculation options and make sure the iteration box has a check in it.

You probably forgot to check the iteration box (see Q1)

Sure. If your operating income is either negative or very low, relative to your firm value,you can end up at an optimal debt ratio of 0%. For instance, if you have EBIT of 100 on afirm value of 10000, a 10% debt ratio would probably push you into a C rating and giveyou a very high cost of capital.Generally, you are right. However, I would suggest that you look at three factors: - If your optimal is just slightly higher or lower than your current debt ratio, it is possible that youare closer to the optimal than the stated optimal. Let me explain. Assume that you are at a 24% debt ratioand the optimal comes out to 30%. The true optimal is really somewhere around 30% sinceI am constrained to work in 10% increments of the debt ratio. If the true optimal were26%, your current debt ratio of 24% is closer to the optimal. - Rating Differences: One of the costs of rating a company based only on the interestcoverage ratio is that the rating might be very different from the actual rating. Thus, yourcurrent cost of capital is based upon your current rating, and the optimal is based uponthe synthetic ratings, and the two don't match, the current and the optimal cost of capitalcan be mismatched. You can get around this by switching to a synthetic rating for computingthe current cost of capital (in the input sheet). - Existing debt at low rates: I assume in the spreadsheet that existing debt gets refinanced atthe new pre-tax cost of debt at each debt ratio. Consequently, if you have a lot of old debt onyour books at much lower rates, the interest expense that I report will be much higher thanyour actual interest expense. This, in turn, can affect your interest coverage ratio and rating.This, too, you can fix by locking in debt at current rates in the input sheet.Not necessarily. If you chose to build in indirect bankruptcy costs (an option on the input page),your operating income also changes as your debt ratio changes. Since the objective ultimately is to maximize firm value, it is possible that the net effect (lower cost of capital is good but it could be offsetby lower operating income) is resulting in an optimal at a higher debt ratio.

I am sorry to say this, but you probably just made an input error. While you might have fixed it, the iterations in the spreadsheet make it very sensitive and the errors will not go away. The only fix (Sorry, sorry…) is to copy the inputs into a fresh version of the spreadsheet.

Inputs

Please enter the name of the company you are analyzing: Disney

Please enter the date that you are doing this analysis Nov-13

Financial Information

Earnings before interest expenses, depreciation & amortization (EBITDA) $11,642.00

Depreciation and Amortization: $2,192.00

Capital Spending: $5,239.00

Interest expense on debt: $349.00

Marginal tax rate to use for pre-tax cost of debt 36.10%

Current Bond Rating on debt (if available): A2/A

Enter the current pre-tax cost of debt for your company 3.75%

Market Information & information on debt

Number of shares outstanding: 1800

Market price per share: $67.71

Beta of the stock: 1.0013

Cash and marketable securities = $3,931.00

Book value of debt: $ 14,288.00

Can you estimate the market value of the interest bearing debt? No

If so, enter the market value of "interest bearing" debt:

Do you want me to try and estimate market value of debt? Yes

If yes, enter the weighted average maturity of outstanding debt? 7.92

Do you have any operating leases? Yes

Indirect bankruptcy costs & ratings constraints (if any)

Do you want to incorporate indirect bankruptcy costs into your optimal? No

If yes, specify the magnitude of your indirect bankruptcy costs Medium

General Market Data

Current riskfree rate in the currency of analysis = 2.12%

Risk premium (for use in the CAPM) 5.76%

Country Default spread (for cost of debt) 0.00%

General Data

Which spread/ratio table would you like to use for your anlaysis? 1

Do you want to assume that existing debt is refinanced at the 'new' rate? Yes

Do you want the firm's current rating & cost of debt to be adjusted to the synthetic ra Yes

B5

Preferably, the EBITDA for the most recent 12 months. If you don't have that, use the most recent year. If you had a bad year (negative or low EBITDA), you can use an average over time.

B6

Depr & Amort (from statement of cash flows)

B7

Capital Expenditures (from statement of cash flows). Enter this as a positive number even though it is shown as a negative number in the cashflow statement.

B8

Interest Expense (from income statement). If you have no debt, enter 0. If you do have debt and cannot find interest expenses, make an estimate by multiplying the debt by a "reasonable" interest rate.

B9

Enter the marginal or statutory tax rate for your country. Check the worksheet in this spreadsheet for marginal tax rate by country.

B10

If your company has a bond rating from S&P or Moody's, you can enter it here. If you don't, that is okay. Just pick "Not rated".

B11

You can use an actual or synthetic rating to come up with a default spread and add that spread to the risk free rate. If you don't have a rating, but have an estimate of the long term cost of borrowing now, you can enter it as well. If you don't have that either, make sure you answer "Yes" to the cell B33.

B13

Be careful to stay in same units. If earnings entered in millions, enter this in millions too. If you have more than one class of shares, use the cumulated number.

B14

Enter the most current stock price, not price as of last statement date.

B15

Enter the levered beta that you have chosen. Preferably, a bottom up beta but if you don't have one, use the regression beta.

B17

Enter the book value of all interest bearing debt on the balance sheet.

B18

Safest answer is No. If all debt is in form of traded bonds, you could answer yes.

B19

If yes, be ready to input this number. Do not include operating leases since that will be considered separately.

B20

If you can estimate maturity of debt, enter yes. The maturity of the debt should be a footnote to your financials.

B21

Enter the weighted average maturity of debt outstanding - should be in footnote to balance sheet

B22

Aswath Damodaran: If you have operating leases, you will have to fill out the operating lease worksheet.

B24

Aswath Damodaran: In the standard analysis, the operating income is assumed to stay fixed while the debt ratio (and bond rating) changes. If you feel that a declining bond rating will affect whether customers buy your products, your pricing power or your costs, enter yes. If not, enter no. If unsure, enter no and run your base case. You can always come back and enter "Yes".

B25

Aswath Damodaran: Some companies are more exposed to indirect bankruptcy costs than others. High: Companies where customers may stop buying the product if the company is perceived to be in trouble, because they are afraid that product quality may suffer or that the product has a long life and may need service/parts. Also, companies whose costs may balloon out if they are perceived to be in trouble. Medium: Companies that have a product that falls in the middle (some customer losses but not substantial) and/or a mix of products. Low: Companies where customers are unconcerned about credit quality of the company and where costs are relatively unaffected by the perception that the company is in financial trouble.

B27

Enter the current riskfree rate in the currency of analysis. If your government is default free, it will be long term government bond rate. If your government has default risk, subtract the sovereign default spread from government bond rate.

B28

This should be the equity risk premium that you will be using for your company. If the company operates in many different countries, you can use a weighted average ERP.

B29

Aswath Damodaran: If your sovereign government bond has a default spread, enter the default spread here. (If you computed the risk free rate from the same government bond, this should be the default spread you subtracted out from that bond.

B32

Aswath Damodaran: Enter 1: Large or stable 2: Small or risky firm The interest coverage ratio/ratings table is the default spreads input worksheet. You can modify them if you want.

B33

Generally safer to answer yes. If you answer no, there will be a transfer of wealth from existing bondholders to stockholders, when the firm borrows more money.

B34

If you used an actual rating, you can switch to a synthetic rating by answering yes. I will switch the current cost of debt to the cost of debt based upon the synthetic rating.

Output SummaryCurrent Optimal

Debt to Capital 11.68% 60.00%

Cost of capital 7.17% 6.26%

Enterprise value $134,067 $163,432

Value per share $67.71 $84.02

For details, check "Optimal Capital Structure" worksheet

\

(Yes or No)

(Yes or No)

Country 2017Afghanistan 20.00%Albania 15.00%Algeria 26.00%Andorra 10.00%Angola 30.00%Anguilla 0.00%Antigua and Barbuda 25.00%Argentina 35.00%Armenia 20.00%Aruba 25.00%Australia 30.00%Austria 25.00%Azerbaijan 20.00%Bahamas 0.00%Bahrain 0.00%Bangladesh 25.00%Barbados 25.00%Belarus 18.00%Belgium 33.99%Benin 30.00%Bermuda 0.00%Bolivia 25.00%Bonaire, Saint Eustatius and 25.00%Bosnia and Herzegovina 10.00%Botswana 22.00%Brazil 34.00%Brunei Darussalam 18.50%Bulgaria 10.00%Burkina Faso 27.50%Burundi 30.00%Cambodia 20.00%Cameroon 33.00%Canada 26.50%Cayman Islands 0.00%Chile 25.50%China 25.00%Colombia 34.00%Congo (Democratic Republic of 35.00%Costa Rica 30.00%Croatia 20.00%Curacao 22.00%Cyprus 12.50%Czech Republic 19.00%Denmark 22.00%Djibouti 25.00%

Dominica 25.00%Dominican Republic 27.00%Ecuador 22.00%Egypt 22.50%El Salvador 30.00%Estonia 20.00%Ethiopia 30.00%Fiji 20.00%Finland 20.00%France 33.33%Gabon 30.00%Gambia 31.00%Georgia 15.00%Germany 29.79%Ghana 25.00%Gibraltar 10.00%Greece 29.00%Grenada 30.00%Guatemala 25.00%Guernsey 0.00%Honduras 25.00%Hong Kong SAR 16.50%Hungary 9.00%Iceland 20.00%India 30.00%Indonesia 25.00%Iraq 15.00%Ireland 12.50%Isle of Man 0.00%Israel 24.00%Italy 24.00%Ivory Coast 25.00%Jamaica 25.00%Japan 30.86%Jersey 20.00%Jordan 20.00%Kazakhstan 20.00%Kenya 30.00%Korea, Republic of 22.00%Kuwait 15.00%Kyrgyzstan 10.00%Latvia 15.00%Lebanon 15.00%Libya 20.00%Liechtenstein 12.50%Lithuania 15.00%

Luxembourg 27.08%Macau 12.00%Macedonia 10.00%Madagascar 20.00%Malawi 30.00%Malaysia 24.00%Malta 35.00%Mauritius 15.00%Mexico 30.00%Moldova 12.00%Monaco 33.33%Mongolia 25.00%Montenegro 9.00%Morocco 31.00%Mozambique 32.00%Myanmar 25.00%Namibia 32.00%Netherlands 25.00%New Zealand 28.00%Nicaragua 30.00%Nigeria 30.00%Norway 24.00%Oman 15.00%Pakistan 31.00%Palestinian Territory 15.00%Panama 25.00%Papua New Guinea 30.00%Paraguay 10.00%Peru 29.50%Philippines 30.00%Poland 19.00%Portugal 21.00%Qatar 10.00%Romania 16.00%Russia 20.00%Rwanda 30.00%Saint Kitts and Nevis 33.00%Saint Lucia 30.00%Saint Vincent and the Grenadi 32.50%Samoa 27.00%Saudi Arabia 20.00%Senegal 30.00%Serbia 15.00%Sierra Leone 30.00%Singapore 17.00%Sint Maarten (Dutch part) 34.50%

Slovakia 21.00%Slovenia 19.00%Solomon Islands 30.00%South Africa 28.00%Spain 25.00%Sri Lanka 28.00%St Maarten 34.50%Sudan 35.00%Suriname 36.00%Swaziland 27.50%Sweden 22.00%Switzerland 17.77%Syria 28.00%Taiwan 17.00%Tanzania 30.00%Thailand 20.00%Trinidad and Tobago 25.00%Tunisia 25.00%Turkey 20.00%Turkmenistan 20.00%Turks and Caicos Islands 0.00%Uganda 30.00%Ukraine 18.00%United Arab Emirates 55.00%United Kingdom 19.00%United States 24.00%Uruguay 25.00%Uzbekistan 7.50%Vanuatu 0.00%Venezuela 34.00%Vietnam 20.00%Yemen 20.00%Zambia 35.00%Zimbabwe 25.00%Africa average 28.21%Americas average 25.66%Asia average 21.28%EU average 21.51%Europe average 19.54%Global average 24.25%Latin America average 27.98%North America average 23.75%Oceania average 28.67%OECD average 24.07%

South America average 27.98%

Operating Lease ConverterOperating lease expenses are really financial expenses, and should be treated as such. Accounting standards allow them tobe treated as operating expenses. This program will convert commitments to make operating leases into debt andadjust the operating income accordingly, by adding back the imputed interest expense on this debt.

InputsOperating lease expense in current year = $875.00 Operating Lease Commitments (From footnote to financials)

Year Commitment ! Year 1 is next year, ….1 $ 507.00 2 $ 422.00 3 $ 342.00 4 $ 272.00 5 $ 217.00

6 and beyond $ 1,784.00

Pre-tax Cost of Debt = 2.66% ! If you do not have a cost of debt, use the attached ratings estimator

From the current financial statements, enter the followingReported Operating Income (EBIT) = $9,450.00 ! This is the EBIT reported in the current income statementReported Interest Expenses = $349.00 OutputNumber of years embedded in yr 6 estimate = 5 ! I use the average lease expense over the first five years

to estimate the number of years of expenses in yr 6Converting Operating Leases into debt

Year Commitment Present Value1 $ 507.00 $493.86 2 $ 422.00 $400.41 3 $ 342.00 $316.10 4 $ 272.00 $244.89 5 $ 217.00 $190.31

6 and beyond $ 356.80 $1,447.05 ! Commitment beyond year 6 converted into an annuity for ten yearsDebt Value of leases = $ 3,092.62

Restated FinancialsOperating Income with Operating leases reclassified as debt = $ 10,015.74 Interest expenses with Operating leases classified as debt = $ 431.26 Depreciation with operating leases classified as debt = $ 2,501.26

Operating Lease ConverterOperating lease expenses are really financial expenses, and should be treated as such. Accounting standards allow them tobe treated as operating expenses. This program will convert commitments to make operating leases into debt and

! This is the EBIT reported in the current income statement

! I use the average lease expense over the first five years

Inputs for synthetic rating estimationEnter the type of firm = 1 (Enter 1 if large financial service firm, 2 if smaller financial service firm)Earnings before interest and taxes (EBIT) = $10,015.74 (Add back only long term interest expense for financial firms)Current interest expenses = $431.26 (Use only long term interest expense for financial firms)Current long term government bond rate = 2.12%OutputInterest coverage ratio = 23.22Estimated Bond Rating = Aaa/AAAEstimated Default Spread = 0.54%Estimated Cost of Debt = 2.66%

For large manufacturing firmsIf interest coverage ratio is

> ≤ to Rating is Spread is Drop in EBITDA-100000 0.199999 D2/D 18.60% 0.00%

0.2 0.649999 C2/C 13.95% 0.00%0.65 0.799999 Ca2/CC 10.63% 0.00%0.8 1.249999 Caa/CCC 8.64% 0.00%1.25 1.499999 B3/B- 4.37% 0.00%1.5 1.749999 B2/B 3.57% 0.00%1.75 1.999999 B1/B+ 2.98% 0.00%

2 2.2499999 Ba2/BB 2.38% 0.00%2.25 2.49999 Ba1/BB+ 1.98% 0.00%2.5 2.999999 Baa2/BBB 1.27% 0.00%3 4.249999 A3/A- 1.12% 0.00%

4.25 5.499999 A2/A 0.99% 0.00%5.5 6.499999 A1/A+ 0.90% 0.00%6.5 8.499999 Aa2/AA 0.72% 0.00%8.50 100000 Aaa/AAA 0.54% 0.00%

For smaller and riskier firmsIf interest coverage ratio is

greater than ≤ to Rating is Spread is Drop in EBITDA-100000 0.499999 D2/D 18.60% 0.00%

0.5 0.799999 C2/C 13.95% 0.00%0.8 1.249999 Ca2/CC 10.63% 0.00%1.25 1.499999 Caa/CCC 8.64% 0.00%1.5 1.999999 B3/B- 4.37% 0.00%2 2.499999 B2/B 3.57% 0.00%

2.5 2.999999 B1/B+ 2.98% 0.00%3 3.499999 Ba2/BB 2.38% 0.00%

3.5 3.9999999 Ba1/BB+ 1.98% 0.00%4 4.499999 Baa2/BBB 1.27% 0.00%

4.5 5.999999 A3/A- 1.12% 0.00%6 7.499999 A2/A 0.99% 0.00%

7.5 9.499999 A1/A+ 0.90% 0.00%9.5 12.499999 Aa2/AA 0.72% 0.00%12.5 100000 Aaa/AAA 0.54% 0.00%

(Enter 1 if large financial service firm, 2 if smaller financial service firm)(Add back only long term interest expense for financial firms)(Use only long term interest expense for financial firms)

CAPITAL STRUCTURE 17

DisneyNovember 1, 2013 Drivers of the optimal debt ratio

Capital Structure Financial Market Income Statement Marginal tax rate =Current MV of Equity = $121,878 Current Beta for Stock = 1.00 Current EBITDA = $12,517 EBITDA/ Enterprise value =Market Value of interest-bearing d $13,028 Current Bond Rating = A2/A Current Depreciation = $2,501 EBIT/ Enterprise value =# of Shares Outstanding = 1800 Summary of Inputs Current Tax Rate = 36.10% Unlevered beta =Debt Value of Operating leases = $3,093 Long Term Government Bond 2.12% Current Capital Spending= $5,239 Equity Risk Premium = 5.76% Pre-tax cost of debt = 3.75% Current Interest Expense = $431

RESULTS FROM ANALYSISCurrent Optimal Change

D/(D+E) Ratio = 11.68% 60.00% 48.32%Implied Growth Rate Calculation

Beta for the Stock = 1.001263852 1.81 0.81 Enterprise value = $134,067 Cost of Equity = 7.89% 12.54% 4.65% Current WACC = 7.17%Rating on Debt A2/A Current FCFF = $3,662.32 ! I am ignoring working capitalAfter-tax cost of Debt = 1.70% 2.07% 0.37% Implied Growth Rate 4.32%

If this number is >your riskfree rate, I use the riskfree rate as a perpetual growth rate.WACC 7.17% 6.26% -0.91%Implied Growth Rate = 2.12%

Assumes perpeutal growth Enterprise value $134,067 $163,432 $29,365 Value/share (Perpetual Growth $67.71 $84.02 $16.31

We use the following default spreads in our analysis. Change them in the input sheet if necessary: Ratings comparison at current debt ratioRating Coverage gt and lt Spread Drop in EBITDACurrent Interest coverage ratio = 23.22AAA 8.5 100000 0.54% 0.00% Rating based upon coverage = Aaa/AAAAA 6.5 8.499999 0.72% 0.00% Interest rate based upon coverage = 2.66%A+ 5.5 6.499999 0.90% 0.00% Current rating for company = A2/AA 4.25 5.499999 0.99% 0.00% Current interest rate on debt = 3.75%A- 3 4.249999 1.12% 0.00% Drop in operating income based on current rating 0.00%BBB 2.5 2.999999 1.27% 0.00%BB 2 2.2499999 2.38% 0.00%B+ 1.75 1.999999 2.98% 0.00%B 1.5 1.749999 3.57% 0.00%B- 1.25 1.499999 4.37% 0.00%


CCC 0.8 1.249999 8.64% 0.00%CC 0.65 0.799999 10.63% 0.00%C 0.2 0.649999 13.95% 0.00%D -100000 0.199999 18.60% 0.00%


Current beta= 1.00 Current Equity= $121,878 Current Depreciation= $2,501 Current Debt= $16,120 Current EBITDA= $12,517 Current Interest rate (Company)= 2.66%Tax rate= 36.10% Current Rating= A2/A Current T.Bond rate= 2.12%Enterprise value = $134,067 Adjusted EBITDA = $12,517

WORKSHEET FOR ESTIMATING RATINGS/INTEREST RATESD/(D+E) 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00%D/E 0.00% 11.11% 25.00% 42.86% 66.67% 100.00% 150.00% 233.33% 400.00% 900.00%$ Debt $0 $13,800 $27,600 $41,400 $55,199 $68,999 $82,799 $96,599 $110,399 $124,199 Beta 0.9232 0.99 1.07 1.18 1.32 1.51 1.81 2.33 3.49 7.73Cost of Equity 7.44% 7.82% 8.29% 8.90% 9.71% 10.84% 12.54% 15.53% 22.24% 46.64%% Drop in EBITD 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%EBITDA $12,517 $12,517 $12,517 $12,517 $12,517 $12,517 $12,517 $12,517 $12,517 $12,517 Depreciation $2,501 $2,501 $2,501 $2,501 $2,501 $2,501 $2,501 $2,501 $2,501 $2,501 EBIT $10,016 $10,016 $10,016 $10,016 $10,016 $10,016 $10,016 $10,016 $10,016 $10,016 Interest $0 $367 $734 $1,101 $1,667 $2,146 $2,687 $10,391 $11,875 $19,961 Taxable Income $10,016 $9,649 $9,282 $8,915 $8,349 $7,870 $7,329 ($375) ($1,860) ($9,945)Tax $3,616 $3,483 $3,351 $3,218 $3,014 $2,841 $2,646 ($135) ($671) ($3,590)Net Income $6,400 $6,165 $5,931 $5,696 $5,335 $5,029 $4,683 ($240) ($1,188) ($6,355)(+)Deprec'n $2,501 $2,501 $2,501 $2,501 $2,501 $2,501 $2,501 $2,501 $2,501 $2,501 Funds from Op. $8,901 $8,667 $8,432 $8,198 $7,836 $7,530 $7,184 $2,261 $1,313 ($3,854)

Pre-tax Int. cov ∞ 27.29 13.64 9.10 6.01 4.67 3.73 0.96 0.84 0.50Funds/Debt ∞ 0.63 0.31 0.20 0.14 0.11 0.09 0.02 0.01 -0.03Likely Rating Aaa/AAA Aaa/AAA Aaa/AAA Aaa/AAA A1/A+ A2/A A3/A- Caa/CCC Caa/CCC C2/CPre-tax cost of deb 2.66% 2.66% 2.66% 2.66% 3.02% 3.11% 3.24% 10.76% 10.76% 16.07%Tax rate 36.10% 36.10% 36.10% 36.10% 36.10% 36.10% 36.10% 34.80% 30.45% 18.11%

COST OF CAPITAL CALCULATIONSD/(D+E) 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00%D/E 0.00% 11.11% 25.00% 42.86% 66.67% 100.00% 150.00% 233.33% 400.00% 900.00%$ Debt $0 $13,800 $27,600 $41,400 $55,199 $68,999 $82,799 $96,599 $110,399 $124,199 Cost of equity 7.44% 7.82% 8.29% 8.90% 9.71% 10.84% 12.54% 15.53% 22.24% 46.64%Cost of debt 1.70% 1.70% 1.70% 1.70% 1.93% 1.99% 2.07% 7.01% 7.48% 13.16%Cost of Capital 7.44% 7.21% 6.97% 6.74% 6.60% 6.41% 6.26% 9.57% 10.43% 16.51%

0 0 0 0 0 0 1 0 0 0Value (perpetual g $127,176 $133,030 $139,448 $146,517 $151,167 $157,587 $163,432 $90,812 $81,377 $47,015

F43

Aswath Damodaran: If you are currently have a low rating, your EBITDA might already be depressed. This adjusts for this drop.


Interest cov Interest cov RATING Interest rate Drop in


Low High EBITDA-100000 0.199999 D2/D 20.72% 0.00%

0.2 0.649999 C2/C 16.07% 0.00%0.65 0.799999 Ca2/CC 12.75% 0.00%0.8 1.249999 Caa/CCC 10.76% 0.00%1.25 1.499999 B3/B- 6.49% 0.00%1.5 1.749999 B2/B 5.69% 0.00%1.75 1.999999 B1/B+ 5.10% 0.00%

2 2.2499999 Ba2/BB 4.50% 0.00%2.25 2.49999 Ba1/BB+ 4.10% 0.00%2.5 2.999999 Baa2/BBB 3.39% 0.00%3 4.249999 A3/A- 3.24% 0.00%

4.25 5.499999 A2/A 3.11% 0.00%5.5 6.499999 A1/A+ 3.02% 0.00%6.5 8.499999 Aa2/AA 2.84% 0.00%8.5 100000 Aaa/AAA 2.66% 0.00%


Drivers of the optimal debt ratioMarginal tax rate = 36.10%EBITDA/ Enterprise value = 9.34%EBIT/ Enterprise value = 7.47%Unlevered beta = 0.9232

! I am ignoring working capital

If this number is >your riskfree rate, I use the riskfree rate as a perpetual growth rate.

Stock price buyback effectCurrent Stock price = $67.71 # Shares outstanding before buyback 1800.00Expected buyback price = $67.71 Enter this number

Current Debt = $16,120 Debt at Optimal = $82,799New Debt issued = $66,679# Shares bought back = 984.767679Shares outstanding after buyback = 815.23

Enterprise value after buyback = $163,432 + Cash 3931 - Debt $82,799.07 Equity value after buyback $84,563.89 / Number of shares after buyback 815.23Value per share for remaining shares $103.73

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

Enterprise Value

Debt Ratio

Debt Ratio Beta Cost of Equity Bond Rating Interest rate on debt Tax Rate0% 0.9232 7.44% Aaa/AAA 2.66% 36.10%10% 0.9888 7.82% Aaa/AAA 2.66% 36.10%20% 1.0707 8.29% Aaa/AAA 2.66% 36.10%30% 1.1761 8.90% Aaa/AAA 2.66% 36.10%40% 1.3165 9.71% A1/A+ 3.02% 36.10%50% 1.5132 10.84% A2/A 3.11% 36.10%60% 1.8082 12.54% A3/A- 3.24% 36.10%70% 2.3279 15.53% Caa/CCC 10.76% 34.80%80% 3.4918 22.24% Caa/CCC 10.76% 30.45%90% 7.7272 46.64% C2/C 16.07% 18.11%

Debt Ratio $ Debt Interest ExpenseInterest Coverage RatioBond Rating Pre-tax cost of d0% $0 $0 ∞ Aaa/AAA 2.66%10% $13,800 $367 27.29 Aaa/AAA 2.66%20% $27,600 $734 13.64 Aaa/AAA 2.66%30% $41,400 $1,101 9.10 Aaa/AAA 2.66%40% $55,199 $1,667 6.01 A1/A+ 3.02%50% $68,999 $2,146 4.67 A2/A 3.11%60% $82,799 $2,687 3.73 A3/A- 3.24%70% $96,599 $10,391 0.96 Caa/CCC 10.76%80% $110,399 $11,875 0.84 Caa/CCC 10.76%90% $124,199 $19,961 0.50 C2/C 16.07%

Cost of Debt (after-tax) WACC Enterprise Value1.70% 7.44% $127,176 1.70% 7.21% $133,030 1.70% 6.97% $139,448 1.70% 6.74% $146,517 1.93% 6.60% $151,167 1.99% 6.41% $157,587 2.07% 6.26% $163,432 7.01% 9.57% $90,812 7.48% 10.43% $81,377 13.16% 16.51% $47,015

Tax rate After-tax cost of debt36.10% 1.70%36.10% 1.70%36.10% 1.70%36.10% 1.70%36.10% 1.93%36.10% 1.99%36.10% 2.07%34.80% 7.01%30.45% 7.48%18.11% 13.16%

Rating is Yes/No IBCAaa/AAA Yes HighAa2/AA No MediumA1/A+ LowA2/AA3/A-

Baa2/BBBBa1/BB+Ba2/BBB1/B+B2/BB3/B-

Caa/CCCCa2/CC

C2/CD2/D

Not rated

Rating is Low IBC Medium High IBCD2/D -30% -50.00% -100%

Caa/CCC -25% -40.00% -50%Ca2/CC -25% -40.00% -50%

C2/C -25% -40.00% -50%B3/B- -15% -25.00% -30%B2/B -10% -20.00% -25%

B1/B+ -10% -20.00% -25%Ba2/BB -10% -20.00% -25%

Ba1/BB+ -10% -20.00% -25%Baa2/BBB -5% -10.00% -15%

A3/A- 0.00% -2.00% -5%A2/A 0.00% 0.00% -2%

A1/A+ 0.00% 0.00% 0%Aa2/AA 0.00% 0.00% 0%

Aaa/AAA 0% 0.00% 0%

Type of firm12

Documents

[XLS]Capital Structure - New York University Stern School of …adamodar/pc/capstru.xls · Web viewSheet1 Input choices page Summary Table ValueChart Repurchase price Worksheet Optimal