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Foodtree LBO Deleverage: Financials

The document provides financial information for a company to calculate its weighted average cost of capital (WACC) and determine an optimal level of debt. It includes metrics such as market values of equity and debt, EBITDA, interest expense, tax rates, and risk-free rates. The results show that increasing debt from the current level of 15.8% of total capital to 40% reduces the WACC, lowering the overall cost of capital and improving returns.

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0% found this document useful (0 votes)
81 views12 pages

Foodtree LBO Deleverage: Financials

The document provides financial information for a company to calculate its weighted average cost of capital (WACC) and determine an optimal level of debt. It includes metrics such as market values of equity and debt, EBITDA, interest expense, tax rates, and risk-free rates. The results show that increasing debt from the current level of 15.8% of total capital to 40% reduces the WACC, lowering the overall cost of capital and improving returns.

Uploaded by

martinsikl
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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Foodtree LBO Deleverage

Financials:
Market Value of Equity (000s) 30000
Market Value of Debt (000s) 70000
Current Interest Rate on Debt 12%
Corporate Tax Rate 30%

T12M EBITDA 12000


T12M Depreciation 1000
T12M Capital Expenditures 500
T12M Interest Expense 1500

Other Variables:
Risk-Free Rate 4.00%
Equity Risk Premium 15.0%
EBITDA growth rate 6%
Capex growth rate 0.06
Assets sales 7000
Year of asset sales 1
Industry: Food distribution
WACC and Deleverage

Company Variables: Synthetic Debt Ratings:

Market Value of Equity (000s) 8,000 Interest Interest Interest


Market Value of Debt (000s) 1,500 Coverage Coverage Rating Rate
Current Interest Rate on Debt 10.0% (Low) (High) Spread
Corporate Tax Rate 35.0% -100000 0.50 D 14.00%
0.5 0.80 C 12.70%
T12M EBITDA 1,200 0.8 1.25 CC 11.50%
T12M Depreciation 100 1.25 1.50 CCC 10.00%
T12M Capital Expenditures 70 1.5 2.00 B- 8.00%
T12M Interest Expense 150 2 2.50 B 6.50%
2.5 3.00 B+ 4.75%
Industry Semiconductor Equipment 87 3 3.50 BB 3.50%
3.5 4.00 BB+ 2.25%
Market Variables: 4 4.50 BBB 2.00%
4.5 6.00 A- 1.90%
Risk-Free Rate 4.00% 6 7.50 A 1.80%
Market Risk Premium 6.0% 7.5 9.50 A+ 1.50%
Equity Beta 1.79 9.5 12.50 AA 1.00%
Custom Beta (select [Custom]): 1.00 12.5 100000.00 AAA 0.75%

Results:
D/(D+E) 0% 10% 20% 30% 40% 50%
D/E 0% 11% 25% 43% 67% 100%
$Debt 0 950 1900 2850 3800 4750

Beta (adjusted for leverage) 1.60 1.71 1.85 2.04 2.29 2.63
Cost of Equity 13.6% 14.3% 15.1% 16.2% 17.7% 19.8%

EBITDA 1200.0 1200.0 1200.0 1200.0 1200.0 1200.0


Depreciation 100.0 100.0 100.0 100.0 100.0 100.0
EBIT 1100.0 1100.0 1100.0 1100.0 1100.0 1100.0
Interest 0.0 45.1 95.0 165.3 224.2 570.0
Taxable Income 1100.0 1054.9 1005.0 934.7 875.8 530.0
Tax 385.0 369.2 351.8 327.1 306.5 185.5
Net Income 715.0 685.7 653.3 607.6 569.3 344.5
Depreciation 100.0 100.0 100.0 100.0 100.0 100.0
Funds from Ops 815.0 785.7 753.3 707.6 669.3 444.5
Pre-tax Int. Coverage N/A 24.38 11.58 6.65 4.91 1.93
Funds / Debt N/A 0.83 0.40 0.25 0.18 0.09
Rating N/A AAA AA A A- B-
Pre-Tax Cost of Debt 4.75% 4.75% 5.00% 5.80% 5.90% 12.00%
Effective tax rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%

Cost of Debt 3.1% 3.1% 3.3% 3.8% 3.8% 7.8%

Cost of Capital (WACC) 13.57%


0 13.15%
0 12.75%
0 12.50%
0 12.17%
1 13.80%
0
Results:
Current Optimal
D/(D+E) 15.8% 40.0%
Equity Beta 1.8 2.3
Cost of Equity 14.7% 17.7%
After Tax Debt Interest 6.5% 3.8%
WACC 13.4% 12.2%

Recommended Debt: 3,800

20.00% 100.0%

15.00% 80.0%
WACC & Debt

60.0%
10.00%
Equity

40.0%
5.00% 20.0%
0.00% 0.0%
0%
10%

30%

50%

90%
20%

40%

60%
70%
80%

% Debt
Cost of Debt Cost of Capital (WACC)
Cost of Equity

60% 70% 80% 90%


150% 233% 400% 900%
5700 6650 7600 8550

3.15 4.02 5.89 12.08


22.9% 28.1% 39.4% 76.5%

1200.0 1200.0 1200.0 1200.0


100.0 100.0 100.0 100.0
1100.0 1100.0 1100.0 1100.0
883.5 1030.8 1178.0 1427.9
216.5 69.3 -78.0 -327.9
75.8 24.2 -27.3 -114.7
140.7 45.0 -50.7 -213.1
100.0 100.0 100.0 100.0
240.7 145.0 49.3 -113.1
1.25 1.07 0.93 0.77
0.04 0.02 0.01 -0.01
CC CC CC C
15.50% 15.50% 15.50% 16.70%
35.0% 35.0% 32.7% 27.0%

10.1% 10.1% 10.4% 12.2%

15.21%
0 15.48%
0 16.22%
0 18.63%
0
Data

Variable
Market Value of Equity

Market Value of Debt

Current Interest Rate on Debt

Corporate Tax Rate

T12M EBITDA

T12M Depreciation
T12M Capital Expenditures
T12M Interest Expense
Industry

Risk-Free Rate

Market Risk Premium

Interest Rate Spread

Rating

Notes:
Enter new data in the yellow cells.

Details
In 000s, enter the current market value of the equity in the business. If
public, this is simply the market cap (# shares out x $ per share). If
private, this is the latest equity valuation that has been assigned to the
business.
In 000s, enter the market value of debt for the business. Typically, this is
the face value.
As a %, enter the interest rate currently paid on your debt. Include the
cost of any commitment fees or warrants as appropriate.
For US companies, the basic rate is 35%. I usually use the effective tax
rate, which means tax paid divided by pre-tax income (latest reporting
period)
In 000s, enter your trailing-12 month EBITDA (Earnings Before Interest,
Taxes, Depreciation & Amortization).
In 000s, enter your trailing-12 month depreciation expense.
In 000s, enter your trailing-12 month expenditures on capital assets.
In 000s, enter your trailing-12 month interest expense.
Select the closest related industry your company falls in. This will set the
industry equity beta. If you believe your equity beta differs significantly
from the preset value, you can select [Custom] and enter your own beta
value further below.
This is the interest rate paid on secure, government interests such as
long term bonds or T-Bills. Recently, this value has tended to be 4%.

The return over and above the risk-free rate that an investor typically
requires the overall market to generate. For US public companies, this
has tended to be 4-6% in recent years. Private equity and venture
capital investors may require a risk premium of 20-30% or more
depending on perceived risk.
Enter the appropriate spread above the risk free rate for each debt rating
if you believe they differ materially from what is presented.
In this model, determined by EBIT/interest coverage ratio. Additional
variables to consider might include: D/(D+E), FFO/Debt, EBITDA/Debt
service, loan-to-value ratio, and operating leverage: % of total costs that
are fixed (fixed charge coverage ratio)
Due to the simplicity of the calculations in the model presented, if your
company has a negative EBITDA, the optimal capital structure will be
100% equity. While technically accurate, there may still be an important
role that debt can play in the business at this stage, particularly if the
EBITDA break-even point is approaching and you want to prolong an
equity raise in order to receive a better valuation.
[Custom] 1 These data can be updated from damodaran.com
Advertising 0.75
Aerospace / Defense 0.84
Air Transport 1.13
Apparel 0.69
Auto & Truck 0.84
Auto Parts 0.93
Bank 0.55
Bank (Canadian) 0.76
Bank (Foreign) 1.15
Bank (Midwest) 0.75
Beverage (Alcoholic) 0.56
Beverage (Soft-Drink) 0.71
Biotechnology 0.93
Building Materials 0.71
Cable TV 1.14
Canadian Energy 0.72
Cement & Aggregates 0.65
Chemical (Basic) 1.03
Chemical (Diversified) 0.75
Chemical (Specialty) 0.77
Coal 0.8
Computer Peripherals 1.07
Computer Software / Services 0.92
Diversified Co. 0.81
Drug / Pharma 0.96
E-Commerce 1.02
Educational Services 0.73
Electric Utility (Central) 0.84
Electric Utility (East) 0.8
Electric Utility (West) 0.91
Electrical Equipment 0.98
Electronics 0.98
Electronics (Foreign) 1.03
Entertainment 0.8
Entertainment Technology 1.17
Environmental 0.71
Financial Services (Diversified) 0.73
Food Processing 0.6
Food Wholesalers 0.6
Furniture 0.83
Grocery 0.86
Healthcare Info 1
Home Appliance 0.84
Homebuilding 0.94
Hotel / Gaming 0.7
Household Products 0.79
Human Resources 0.91
Industrial Services 0.74
Information Services 0.79
Insurance (Life) 0.73
Insurance (Property) 0.68
Internet 1.01
Investment Co. 0.73
Investment Co. (Foreign) 0.96
Machinery 0.79
Manufactured Housing / RV 0.94
Maritime 0.45
Medical Services 0.74
Medical Supplies 0.81
Metal Fabricating 0.71
Metals & Mining (Diversified) 0.72
Natural Gas (Distribution) 0.7
Natural Gas (Diversified) 0.91
Newspaper 0.86
Office Equipment / Supplies 0.77
Oilfield Services / Equipment 0.79
Packaging & Containers 0.83
Paper / Forest Products 0.83
Petroleum (Integrated) 0.9
Petroleum (Producer) 0.68
Pharmacy Services 0.81
Power 0.92
Precious Metals 0.67
Precision Instruments 1.03
Publishing 0.75
Railroad 0.72
Recreation 0.76
REIT 0.68
Restaurant 0.68
Retail (Automotive) 0.97
Retail (Building Supplies) 0.99
Retail (Special Lines) 0.84
Retail Stores 0.8
Securities Brokerage 1.04
Semiconductor 1.4
Semiconductor Equipment 1.79
Shoe 0.87
Steel (General) 0.87
Steel (Integrated) 0.78
Telecom (Equipment) 1.21
Telecom (Foreign) 1.03
Telecom (Services) 0.83
Thrift 0.49
Tire & Rubber 0.97
Tobacco 0.73
Toiletries / Cosmetics 0.79
Trucking 0.87
Utility (Foreign) 0.84
Utility (Water) 0.6
Wireless Networking 1.24
m damodaran.com
You can update the corporate spreads from a table such as this on, available (at a price) from bondsonline.com

Source: bondsonline.com
from bondsonline.com

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