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    Cost of Equity and Beta: Debt Ratios

    Uploaded by

    minhthuc203
    This document analyzes the optimal capital structure for Telecom Italia. It shows that increasing the debt ratio from 15.84% to 40% would decrease the weighted average cost of capital from 7.98% to 7.45% and increase the implied growth rate and firm value. Specifically: - The optimal debt ratio is 40% compared to the current 15.84% - This lowers the WACC from 7.98% to 7.45% and raises the implied growth rate from 6% to N/A - Firm value increases from $61,939 to $86,035 under a constant growth model and from $61,939 to $66,351 under a no-growth model.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLS, PDF, TXT or read online from Scribd

    Cost of Equity and Beta: Debt Ratios

    Uploaded by

    minhthuc203
    61 views11 pages
    This document analyzes the optimal capital structure for Telecom Italia. It shows that increasing the debt ratio from 15.84% to 40% would decrease the weighted average cost of capital from 7.98% to 7.45% and increase the implied growth rate and firm value. Specifically: - The optimal debt ratio is 40% compared to the current 15.84% - This lowers the WACC from 7.98% to 7.45% and raises the implied growth rate from 6% to N/A - Firm value increases from $61,939 to $86,035 under a constant growth model and from $61,939 to $66,351 under a no-growth model.

    Original Description:

    Tel Italia Cs

    Original Title

    Tel Italia Cs

    Copyright

    © Attribution Non-Commercial (BY-NC)

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    XLS, PDF, TXT or read online from Scribd

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    This document analyzes the optimal capital structure for Telecom Italia. It shows that increasing the debt ratio from 15.84% to 40% would decrease the weighted average cost of capital from 7.98% to 7.45% and increase the implied growth rate and firm value. Specifically: - The optimal debt ratio is 40% compared to the current 15.84% - This lowers the WACC from 7.98% to 7.45% and raises the implied growth rate from 6% to N/A - Firm value increases from $61,939 to $86,035 under a constant growth model and from $61,939 to $66,351 under a no-growth model.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLS, PDF, TXT or read online from Scribd
    Download as xls, pdf, or txt
    61 views11 pages

    Cost of Equity and Beta: Debt Ratios

    Uploaded by

    minhthuc203
    This document analyzes the optimal capital structure for Telecom Italia. It shows that increasing the debt ratio from 15.84% to 40% would decrease the weighted average cost of capital from 7.98% to 7.45% and increase the implied growth rate and firm value. Specifically: - The optimal debt ratio is 40% compared to the current 15.84% - This lowers the WACC from 7.98% to 7.45% and raises the implied growth rate from 6% to N/A - Firm value increases from $61,939 to $86,035 under a constant growth model and from $61,939 to $66,351 under a no-growth model.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLS, PDF, TXT or read online from Scribd
    Download as xls, pdf, or txt
    of 11

    Chart - Cost of Equity

    Cost of Equity and Beta: Debt Ratios

    7.00

    40.00%

    35.00%

    6.00

    30.00%

    5.00
    25.00%
    4.00
    20.00%
    3.00
    15.00%
    2.00
    10.00%

    1.00

    5.00%

    0.00

    0.00%
    0%

    10%

    20%

    30%

    40%

    50%

    60%

    Page 1

    70%

    80%

    90%

    Beta
    Cost of Equity

    Debt Ratio
    0%
    10%
    20%
    30%
    40%
    50%
    60%
    70%
    80%
    90%

    Beta
    0.79
    0.84
    0.89
    0.97
    1.06
    1.20
    1.40
    1.87
    2.94
    5.88

    Cost of Equity Bond RatingInterest rate on debt


    8.63%
    AAA
    4.54%
    8.88%
    AAA
    4.54%
    9.19%
    A+
    5.24%
    9.59%
    A5.74%
    10.12%
    BB
    6.74%
    10.87%
    B9.24%
    11.98%
    CCC
    10.24%
    14.60%
    CC
    11.74%
    20.50%
    C
    13.24%
    36.76%
    C
    13.24%

    Tax Rate Cost of Debt (after-tax)


    49.08%
    2.31%
    49.08%
    2.31%
    49.08%
    2.67%
    49.08%
    2.92%
    49.08%
    3.43%
    49.08%
    4.71%
    49.08%
    5.21%
    41.76%
    6.84%
    32.40%
    8.95%
    28.80%
    9.43%

    WACC
    8.63%
    8.22%
    7.89%
    7.59%
    7.45%
    7.79%
    7.92%
    9.17%
    11.26%
    12.16%

    Firm Value (G)


    $45,598
    $54,659
    $65,095
    $77,927
    $86,035
    $68,933
    $63,772
    $37,267
    $20,942
    $17,340

    CAPITAL STRUCTURE
    When you open this program, you might find a warning about circular references. Before you input any
    numbers, go into "options" or "preferences" under "tools", and choose "calculation". Check off the iteration box, if it is
    not already chosen.
    INPUT SHEET FOR CAPITAL STRUCTURE
    Please enter the name of the company you are analyzing: Telecom Italia

    Your company's name

    Please enter the following information on the company you are analysing:
    Earnings before interest, taxes and depreciation (EBITDA)$10,173.00 (in currency)
    Depreciation and Amortization:

    $5,842.00

    (in currency)

    Capital Spending:

    $7,391.00

    (in currency)

    $306.00

    (in currency)

    Current Rating on debt (if available):

    AAA

    (Rating)

    Interest rate based upon rating:

    4.44%

    (Look up table below for spread)

    Tax rate on ordinary income:

    49.08%

    (in percent)

    Number of shares outstanding:

    5255

    (in units)

    Market price per share:

    $9.92

    (in currency)

    Interest expense on debt:

    Beta of the stock:


    Book value of debt:

    0.87
    $9,809.00

    Can you estimate the market value of the outstanding debt?

    No

    If so, enter the market value of debt:


    Do you want me to try and estimate market value of debt?
    If yes, enter the average maturity of outstanding debt?

    (in currency)
    (Yes or No)
    (in currency)

    No
    (in years)

    [If you do not have the maturity of your debt available, enter an approximation - say, 10 years]

    17

    CAPITAL STRUCTURE

    Please enter the following market information:


    Current short-term (ST) government rate:

    5.00%

    (in percent)

    Current long-term (LT) government rate:

    4.24%

    (in percent)

    Which rate would you like to use as the riskfree rate in the CAPM?
    Risk premium (for use in the CAPM)

    5.53%

    Please enter the following information for computing ratings/spreads


    The following are the defaults used in the program:
    If coverage ratio is
    greater than

    to

    Rating is

    -100000

    0.2499999

    12.00%

    0.25

    0.6699999

    9.00%

    0.67

    0.8699999

    CC

    7.50%

    0.87

    1.2699999

    CCC

    6.00%

    1.27

    1.5699999

    B-

    5.00%

    1.57

    1.8699999

    4.00%

    1.87

    2.1699999

    B+

    3.00%

    2.17

    2.7599999

    BB

    2.50%

    2.76

    3.2899999

    BBB

    2.00%

    3.29

    4.4899999

    A-

    1.50%

    4.49

    5.649999

    1.25%

    5.65

    6.849999

    A+

    1.00%

    6.85

    9.349999

    AA

    0.70%

    Spread over long bond is

    LT
    (in percent)

    (ST or LT)

    18

    CAPITAL STRUCTURE

    9.65

    100000

    AAA

    Do you want to change these defaults?

    0.30%

    No

    (Yes or No)

    If you want to change these defaults, please enter the new values below:
    If coverage ratio is
    greater than

    to

    Rating is

    Spread is

    -100000

    0.2499999

    12.00%

    0.25

    0.6699999

    9.00%

    0.67

    0.8699999

    CC

    7.50%

    0.87

    1.2699999

    CCC

    6.00%

    1.27

    1.5699999

    B-

    5.00%

    1.57

    1.8699999

    4.00%

    1.87

    2.1699999

    B+

    3.00%

    2.17

    2.7599999

    BB

    2.50%

    2.76

    3.2899999

    BBB

    2.00%

    3.29

    4.4899999

    A-

    1.50%

    4.49

    5.649999

    1.25%

    5.65

    6.849999

    A+

    1.00%

    6.85

    9.349999

    AA

    0.70%

    9.65

    100000

    AAA

    0.30%

    Computational Options
    The calculations assume that existing debt is refinanced at the 'recalculated rate' in calculating interest cost.

    19

    CAPITAL STRUCTURE

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

    Yes

    (Yes or No)

    The rating estimated for the firm at its existing debt ratio may be different from its actual rating.
    Do you want the firm's rating to be adjusted to the estimated rating?
    No
    THE OUTPUT FOLLOWS

    (Yes or No)

    20

    CAPITAL STRUCTURE
    ANALYZING CAPITAL STRUCTURE
    INPUTS FOR ANALYSIS
    Capital Structure
    Current MV of Equity =
    Current Outstanding Debt =
    # of Shares Outstanding =
    Riskless rate to use in CAPM =
    Risk Premium =

    $52,130
    $9,809
    5255
    4.24%
    5.53%

    Financial Market
    Current Beta for Stock =
    Current Bond Rating =
    Current T.Bill Rate =
    Current T. Bond Rate =
    Current Interest Rate =

    RESULTS FROM ANALYSIS


    Current
    D/(D+E) Ratio =
    15.84%

    0.87
    AAA
    5.00%
    4.24%
    4.44%

    Telecom Italia

    Income Statement
    Current EBITDA =
    $10,173
    Current Depreciation =
    $5,842
    Current Tax Rate =
    49.08%
    Current Capital Spending= $7,391
    Current Interest Expense = $306.00

    Optimal
    40.00%

    Change
    24.16%

    Beta for the Stock =


    Cost of Equity =

    0.87
    9.05%

    1.06
    10.12%

    0.19
    1.07%

    AT Interest Rate on Debt =

    2.26%

    3.43%

    1.17%

    WACC
    Implied Growth Rate =

    7.98%
    6.00%

    7.45%

    -0.53%

    Market Value of Firm (C) = $61,939


    Market Value of Firm (G) = $61,939

    $66,351
    $86,035

    $4,413
    $24,096

    Market Price/share (C) =


    Market Price/share (G) =

    $10.76
    $14.51

    $0.84
    $4.59

    $9.92
    $9.92

    We use the following default spreads in our analysis. Change them in the input sheet if necessary:
    Ratings comparison at current debt ratio
    Rating
    Coverage gt
    and lt
    Spread
    Current Interest coverage ratio =
    14.15
    AAA
    9.65
    100000
    0.30%
    Rating based upon coverage =
    AAA
    AA
    6.85
    9.35
    0.70%
    Interest rate based upon coverage =
    0.0454
    A+
    5.65
    6.849999
    1.00%
    Current rating for company =
    AAA
    A
    4.49
    5.649999
    1.25%
    Current interest rate on debt =
    4.44%
    A3.29 4.4899999
    1.50%
    BBB
    2.76 3.2899999
    2.00%
    BB
    2.17 2.7599999
    2.50%
    B+
    1.87 2.1699999
    3.00%
    B
    1.57 1.8699999
    4.00%
    B1.27 1.5699999
    5.00%

    21

    CAPITAL STRUCTURE
    CCC
    CC
    C
    D

    0.87
    0.67
    0.25
    -100000

    1.2699999
    0.8699999
    0.6699999
    0.2499999

    6.00%
    7.50%
    9.00%
    12.00%

    22

    CAPITAL STRUCTURE

    23

    Current beta=
    Current Debt=
    Tax rate=

    0.87
    $9,809
    49.08%

    D/(D+E)
    D/E
    $ Debt
    Beta
    Cost of Equity

    0.00%
    0.00%
    $0
    0.79
    8.63%

    10.00%
    11.11%
    $6,194
    0.84
    8.88%

    EBITDA
    Depreciation
    EBIT
    Interest
    Taxable Income
    Tax
    Net Income
    (+)Deprec'n
    Funds from Op.

    $10,173
    $5,842
    $4,331
    $0
    $4,331
    $2,126
    $2,205
    $5,842
    $8,047

    $10,173
    $5,842
    $4,331
    $281
    $4,050
    $1,988
    $2,062
    $5,842
    $7,904

    $10,173
    $5,842
    $4,331
    $649
    $3,682
    $1,807
    $1,875
    $5,842
    $7,717

    $10,173
    $5,842
    $4,331
    $1,067
    $3,264
    $1,602
    $1,662
    $5,842
    $7,504

    $10,173
    $5,842
    $4,331
    $1,670
    $2,661
    $1,306
    $1,355
    $5,842
    $7,197

    $10,173
    $5,842
    $4,331
    $2,862
    $1,469
    $721
    $748
    $5,842
    $6,590

    $10,173
    $5,842
    $4,331
    $3,806
    $525
    $258
    $268
    $5,842
    $6,110

    Pre-tax Int. cov


    Funds Int. Cov
    Funds/Debt

    15.40
    28.11
    1.28

    6.67
    11.89
    0.62

    4.06
    7.04
    0.40

    2.59
    4.31
    0.29

    1.51
    2.30
    0.21

    AAA
    4.54%
    49.08%

    AAA
    4.54%
    49.08%

    A+
    5.24%
    49.08%

    A5.74%
    49.08%

    BB
    6.74%
    49.08%

    B9.24%
    49.08%

    Likely Rating
    Interest Rate
    Eff. Tax Rate

    Current Equity=
    Current EBITDA=
    Current Rating=

    $52,130
    $10,173
    AAA

    Current Depreciation=
    Current Interest rate (Company)=
    Current T.Bond rate=
    Six-month T.Bill rate=
    WORKSHEET FOR ESTIMATING RATINGS/INTEREST RATES
    20.00%
    30.00%
    40.00%
    50.00%
    60.00%
    70.00%
    25.00%
    42.86%
    66.67%
    100.00%
    150.00%
    233.33%
    $12,388
    $18,582
    $24,775
    $30,969
    $37,163
    $43,357
    0.89
    0.97
    1.06
    1.20
    1.40
    1.87
    9.19%
    9.59%
    10.12%
    10.87%
    11.98%
    14.60%

    $5,842
    4.44%
    4.24%
    5.00%
    80.00%
    400.00%
    $49,551
    2.94
    20.50%

    90.00%
    900.00%
    $55,745
    5.88
    36.76%

    $10,173
    $5,842
    $4,331
    $5,090
    ($759)
    ($373)
    ($387)
    $5,842
    $5,455

    $10,173
    $5,842
    $4,331
    $6,561
    ($2,230)
    ($1,094)
    ($1,135)
    $5,842
    $4,707

    $10,173
    $5,842
    $4,331
    $7,381
    ($3,050)
    ($1,497)
    ($1,553)
    $5,842
    $4,289

    1.14
    1.61
    0.16

    0.85
    1.07
    0.13

    0.66
    0.72
    0.09

    0.59
    0.58
    0.08

    CCC
    10.24%
    49.08%

    CC
    11.74%
    41.76%

    C
    13.24%
    32.40%

    C
    13.24%
    28.80%

    CAPITAL STRUCTURE

    24

    WORKSHEET FOR CALCULATING WEIGHTED AVERAGE COST OF CAPITAL


    10.00%
    20.00%
    30.00%
    40.00%
    50.00%
    60.00%
    70.00%
    11.11%
    25.00%
    42.86%
    66.67%
    100.00%
    150.00%
    233.33%
    $6,194
    $12,388
    $18,582
    $24,775
    $30,969
    $37,163
    $43,357

    D/(D+E)
    D/E
    $ Debt

    0.00%
    0.00%
    $0

    Cost of equity

    8.63%

    8.88%

    9.19%

    9.59%

    10.12%

    10.87%

    11.98%

    Cost of debt

    2.31%

    2.31%

    2.67%

    2.92%

    3.43%

    4.71%

    WACC

    8.63%

    8.22%

    7.89%

    7.59%

    7.45%

    $57,240
    $45,598

    $60,083
    $54,659

    $62,651
    $65,095

    $65,097
    $77,927

    $66,351
    $86,035

    Firm Value (C)


    Firm Value (G)

    80.00%
    400.00%
    $49,551

    90.00%
    900.00%
    $55,745

    14.60%

    20.50%

    36.76%

    5.21%

    6.84%

    8.95%

    9.43%

    7.79%

    7.92%

    9.17%

    11.26%

    12.16%

    $63,452
    $68,933

    $62,358
    $63,772

    $53,901
    $37,267

    $43,871
    $20,942

    $40,624
    $17,340

    *Firm Value (C): No growth in savings. New Firm Value=Current Firm value +{(WACC(current)-New WACC)*Current firm value/New WACC}

    CAPITAL STRUCTURE
    *Firm Value (G): Savings grow. New Firm Value = (EBIT*(1-t)+Depreciation-Capital Spending)/(New WACC-g)
    The program uses the following interest coverage ratios and ratings relationships. You can modify them on the input sheet.
    The interest rates are automatically updated when the T.Bond rate is entered.
    Interest cov
    Low
    -100000
    0.25
    0.67
    0.87
    1.27
    1.57
    1.87
    2.17
    2.76
    3.29
    4.49
    5.65
    6.85
    9.65

    Interest cov
    High
    0.2499999
    0.6699999
    0.8699999
    1.2699999
    1.5699999
    1.8699999
    2.1699999
    2.7599999
    3.2899999
    4.4899999
    5.649999
    6.849999
    9.349999
    100000

    RATING

    Interest rate

    D
    C
    CC
    CCC
    BB
    B+
    BB
    BBB
    AA
    A+
    AA
    AAA

    16.24%
    13.24%
    11.74%
    10.24%
    9.24%
    8.24%
    7.24%
    6.74%
    6.24%
    5.74%
    5.49%
    5.24%
    4.94%
    4.54%

    25

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