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Financing Mix
17. The Trade off
18. Cost of Capital Approach
19. Cost of Capital: Follow up
20. Cost of Capital: Wrap up
21. Alternative Approaches
22. Moving to the optimal
Financing Type
23. The Right Financing
Investment Return
14. Earnings and Cash flows
15. Time Weighting Cash flows
16. Loose Ends
Dividend Policy
24. Trends & Measures
25. The trade off
26. Assessment
27. Action & Follow up
28. The End Game
Valuation
29. First steps
30. Cash flows
31. Growth
32. Terminal Value
33. To value per share
34. The value of control
35. Relative Valuation
What is debt?
term.
Any
lease
obligaNon,
whether
operaNng
or
capital.
and
it
has
recently
borrowed
long
term
from
a
bank,
use
the
interest
rate
on
the
borrowing
or
esNmate
a
syntheNc
raNng
for
the
company,
and
use
the
syntheNc
raNng
to
arrive
at
a
default
spread
and
a
cost
of
debt
For
those
rms
that
have
bond
raNngs
from
global
raNngs
agencies,
I
used
those
raNngs:
Company
S&P Rating Risk-Free Rate Default Spread Cost of Debt
Disney
A
2.75% (US $)
1.00%
3.75%
Deutsche Bank
A
1.75% (Euros)
1.00%
2.75%
Vale
A2.75%c(US
1.30%
4.05%we
can
again
use
If
you
want
to
esNmate
Vales
ost
$)of
debt
in
$R
terms,
22.57
11.67
4.51
23.72
5.16
AAA
AA
A-
AAA
A-
8
Vales
syntheNc
raNng
is
AA,
but
the
actual
raNng
for
dollar
debt
is
A-.
The
biggest
factor
behind
the
dierence
is
the
presence
of
country
risk,
since
Vale
is
probably
being
rated
lower
for
being
a
Brazil-based
corporaNon.
Deutsche
Bank
had
an
A
raNng.
We
will
not
try
to
esNmate
a
syntheNc
raNng
for
the
bank.
Dening
interest
expenses
on
debt
for
a
bank
is
dicult
9
For Bookscape, we will use the syntheNc raNng (A-) to esNmate the cost of debt:
For
the
three
publicly
traded
rms
that
are
rated
in
our
sample,
we
will
use
the
actual
bond
raNngs
to
esNmate
the
costs
of
debt.
Company
S&P Rating Risk-Free Rate Default Spread Cost of Debt Tax Rate After-Tax Cost of Debt
Disney
A we
have
2.75%
(US o$)f
AA-
from
1.00%
3.75% bond-raNng
36.1% rm,
that
m
2.40%
Rupees
India
TMT
=
6.57%
+
2.25%
+
0.70%
=
9.62%
Aler-tax
cost
of
debt
=
9.62%
(1-.3245)
=
6.50%
10
RaNng
Aaa/AAA
Aa1/AA+
Aa2/AA
Aa3/AA-
A1/A+
A2/A
A3/A-
Baa1/BBB+
Baa2/BBB
Baa3/BBB-
Ba1/BB+
Ba2/BB
Ba3/BB-
B1/B+
B2/B
B3/B-
Caa/CCC+
1
year
0.05%
0.11%
0.16%
0.22%
0.26%
0.33%
0.46%
0.58%
0.47%
0.95%
1.68%
2.40%
3.12%
3.84%
4.56%
5.28%
6.00%
5
year
0.18%
0.37%
0.55%
0.60%
0.65%
0.67%
0.84%
1.09%
1.27%
1.53%
2.29%
3.04%
3.80%
4.56%
5.31%
6.06%
6.82%
10
Year
0.42%
0.57%
0.71%
0.75%
0.78%
0.84%
1.00%
1.32%
1.52%
1.78%
2.59%
3.39%
4.20%
5.01%
5.81%
6.62%
7.43%
30
year
0.65%
0.82%
0.98%
0.99%
1.00%
1.12%
1.26%
1.67%
1.91%
2.18%
2.97%
3.77%
4.57%
5.36%
6.16%
6.96%
7.75%
11
pages)
A
pre-tax
cost
of
debt
for
your
rm
An
aler-tax
cost
of
debt
for
your
rm
12
Task
EsNmate
the
cost
of
debt
for
your
company
13
Read
Chapter
4
Chapter 4