Company Privately Held

Bottom-up Beta/Pure Play Approach

Steps
1. Identify the listed/publicly traded peers (minimum of 5; same industry)
2. Identify the relevant market index
3. Stock prices are on the same currency; currency of stock same as base of index
4. Get information regarding stock price, level of debt, level of equity, and tax rate ()
a. Total Value of Debt and Equity (Market value) relative to peers
b. (Long Term Debt) (If Level of Long Term Debt is small relative to total debt)
c. (If Long Term Debt is below 60% use total debt)
d.
5. Compute for Beta of Peers along with debt-to-equity ratio
6. Compute for the unlevered Beta of the Peers
* Leverage = Amount of Debt
Default Beta using CAPM is Levered Beta
Hamada Equation
Computing for Unleveraged Beeta
Beta (Levered) = Beta (Unlevered) x [1+(Debt/Equity)*(1-Tax Rate)]
7. Averaged Unlevered Beta (Compute Each Unleveraged Beta of Peers then average it)
8. Compute the target debt equity level of the firm
9. Compute for the levered Beta of the Firm and Tax Rate
Use Hamada Equation and use the Averaged Unleveraged Beta of your peers
10. Adjusting for Lack of Market Liquidity
11. Adjust for Level of Cash (Relative to Total Firm Value)
*Cash is adjusted because it that a Beta of 0 and we adjusted it because ***
*It is the process of getting the Unlevered Beta if there is no Cash
Period A B C
1 10% 25% -12%
2 -7% 10% -5%
3 8% -18% 6%
4 14% 4% 13%
5 -20% 7% 17%
6 15% -5% 27%
7 16% 6% 9%
8 -5% 13% 4%
9 8% 18% -5%
10 7% -2% -8%

Debt Level 30% 45% 15%

Tax Rate 30% 25% 15%

Levered Beta 5.7481752% -13.1106120% 2.7302077%

5.7481752% -13.1106120% 2.7302077%
Debt Equity Ratio 43% 82% 18%
Unlevered Beta 4.42167% -8.124886% 2.374094%

Assume that the target Company has a relevant Equation using Hamada Equation
Debt-to-Equity Ratio 40%
Tax Rate 30%
Average Unlevered Beta 7.03279%
Levered Beta of Company 9.0019698%
Adjusted Beta for lack of liquidity 35.812770557%
Adjusted Unlevered Beta 5.201968490933710% -11.606980456574400% 3.165458259079330%
Average Adjusted Unlevered Be 12.581145721693100%
Adjusted Levered Beta 16.103866523767200%
---------------------------------------------------------
Correlation to the Market 0.087979956037393 -0.191503498050167 0.03942745268711
Absolute Value 0.087979956037393 0.191503498050167 0.03942745268711

Cash Relative to Firm Value 15% 30% 25%

Adjusted Levered BETA (For cash and lack of liquidity) =

*Use Hamada, but use the
Adjusted Unlevered Beta

Company Beta Level of Debt (MV)

A 1.4 2,500
B 1.2 5
C 1.2 540
D 0.7 8
E 1.5 2900
Average
Firm 1.12672927558745
Levered Beta of Privately Held Firm
 D M Average
7% -18%
12% 14%
5% 25%
9% 30%
-4% -7%
-15% -15%
8% 18%
7% 20%
9% 15%
-10% -10%

25%
40%

35.3523302%
35.3523302%
33%
29.460275% 7.03279%

53.564136593333700% 12.581145721693100%

0.686537115255714
0.686537115255714 0.251362005507596

45%

Level of Equity (MV) Debt/ETax Rate Unlevered Beta

3000 0.833 40% 0.933333333
200 0.025 40% 1.18226601
2250 0.24 40% 1.048951049
300 0.027 40% 0.688976378
4000 0.725 40% 1.045296167
0.979764587
25% 40%
 A B C D M
A 0.012164 -0.002288 0.000264 -0.000268 0.001638
B -0.002288 0.013356
C 0.000264 -0.006568 0.013664
D -0.000268 0.004466 -0.004638 0.007556
M 0.001638 -0.003736 0.000778 0.010074 0.028496
 A B C D M
A 1 -0.179506264 0.0204774934 -0.027954428 0.087979956
B -0.179506264 1 -0.486189989 0.4445642534 -0.191503498
C 0.020477493 -0.486189989 1 -0.456452766 0.039427453
D -0.027954428 0.4445642534 -0.456452766 1 0.686537115
M 0.087979956 -0.191503498 0.0394274527 0.6865371153 1
Forex = ratio of one currency over the other
Valuing one currency over the other
You're tryin to get the value of two currencies, one relative to the other

Two Curencies
Home Currency
Foreign Currency

Define Home Currency HC

Currency of Country to which you want to value another currency
There's no default home currency, but define it to avoid confusion

Foreign Currency FC
Currency you want to value at a particular Home Currency

Direct Quotation measuring HC/FC

Indirect Quotation measuring FC/HC
In both instances you are measuring or valuing the Foreign Currency

Alternative in the Old Days

American Terms Dollar/FC
European Terms FC/Dollar

Peso to Dollar Exchange Rate 51.75

Direct. We are valuing the Dollar in the Philippines
Philippines = HC
European

Currency Appreciation/Depreciation
- return of currency
- one currency appreciates, the other depreciates

Historical Peso-Dollar over last 5 years

USD 48 50 46 49
PHP 0.0208333333 0.02 0.021739130434783 0.0204081632653
USD 50/48 - 1 4.1666667% -8.0000000% 6.5217391%
PHP -4.0000000% 8.6956522% -6.1224490%
Alternative PHP 48/50 - 1 -4.000000% 8.695652% -6.122449%
Gross Return
USD 104.1666667% 92.0000000% 106.5217391%
PHP 96.0000000% 108.6956522% 93.8775510%

Ideal World
Real Return for Country A = Real Return for Country B and every other country
(1+r) = (1+rfr)(1+infR)
(1 + RealA) = (1 + RealB)

Forex Rate = S
S = A/B

S0 = Current Spot Exchange Rate

Sn = S0*((1+Ra)/(1+Rb))^n

Country Risk
Compute for Country Risk Premium
- based on:
Spread of Government Debt =- Spread of T-Bills
Government Debt Rate/Government Debt Rate

USA (Long-term Gov. Debt) 4%

Germany (Long-term Gov. Debt) 6%
If target company is riskier Country Spread is Positive
Country Spread (2% or 200 basis poi 2%
Country Risk Premium Germany in Dollar Terms 2%*(Sigma of Stock/Sigma of Bon
Get relative volatility of Bond to Stock Sigma of Stock = 40%
Sigma of Bond = 25%

SAMPLE:
9.40%
German Bank

Risk Premium 6%
US Based Investment

10-Year Euro Bond 3.60%

US RFR 3.50%
Country Spread 0.10%

Country Risk Premium

SAMPLE:
Compute for the Dollar Cost of a Brazillian Company's Debt

Inflation Rate
US 2%
Brazil 7%
Cost of Debt in Brazillian Reales 13.80%
Cost of Debt in US 8.482243%

Part of British Company Planning to invest in South Korea

Korean Won
Analyze based on Pound, NPVs, Discount Rates

Inflation Rate (UK) 3.5000000% 3.5000000%

Inflation Rate (Korea) 4.0000000% 4.0000000%
Inflation Averaged (UK) 3.5000000% 3.5000000%
Inflation Averaged (Korea) 4.0000000% 4.0000000%

0 1 2
Project in Korean 0 1 2
Expected Inflation 1.0048309178744 1.0048309178744
Average Expected Inflation 1.00485680536338 1.0048568053634
Pound to Won Spot Rate 1481.7272 1,488.885 1,496.078
Cash Flow (Billion) (Won) -750 300 300
Cash Flow (Billion) (Pounds) -0.5061660473 0.20149302 0.2005243062198
Pound to Won Spot Rate Average 1481.7272 1488.92366061203 1496.1550730326
Cash Flow (Billion) (Won)
Cash Flow (Billion) (Pound) -0.5061660473 0.201487831737917 0.2005139743917
₱109.75772

Discount Rate = 10% projects denominated in Pounds

NPV of project in Pounds 109.7828883557
NPV of project in Korean Won

Pound Won
Discount Rates 10.0000000% 10.5342486%
 52 Average Geometric Mean
0.01923076923
6.1224490% 2.2027137% 2.0212233%
-5.7692308% 2.0212233%
-5.769231% -1.799007% -1.981179%

106.1224490%
94.2307692%
 Contry Risk Premium
gma of Stock/Sigma of Bond) 3.2000%
of Stock = 40%
of Bond = 25%
 3.5000000% 3.0000000% 3.0000000% 3.0000000% 2.5000000% 2.5000000% 2.5000000%
4.0000000% 3.5000000% 3.5000000% 3.5000000% 3.0000000% 3.0000000% 3.0000000%
3.5000000% 3.3676841% 3.2907079% 3.2403703% 3.1224905% 3.0369035% 2.9719610%
4.0000000% 3.8686728% 3.7919553% 3.7416574% 3.6254165% 3.5406119% 3.4760266%

3 4 5 6 7 8 9
3 4 5 6 7 8 9
1.00483091787 1.004854369 1.004854369 1.004854369 1.004878049 1.004878049 1.004878049
1.00485680536 1.004856805 1.004856805 1.004856805 1.004856805 1.004856805 1.004856805
1,503.305 1,510.60 1,517.94 1,525.30 1,532.75 1,540.22 1,547.74
120 120 -250 200 250 300 -700
0.07982409882 0.079438475 -0.164697322 0.131121346 0.163106043 0.19477712 -0.452273732
1503.42160702 1510.723433 1518.060723 1525.433648 1532.842383 1540.2871 1547.767974

0.07981792961 0.079432143 -0.164683794 0.131110259 0.163095699 0.194768884 -0.452264171

2.5000000%
3.0000000%
2.9210083%
3.4252077%

NPV
10
10
1.004878049
1.004856805
1,555.29
800 ₱162,631.0
0.514375119 ₱109.78289
1555.285182

0.514375119 109.757716488
CROSS RATES
(DENOMINATOR SA LEFT) BID ASK Spread
Peso per USD (USD:PHP) 52.05 - 62 52.62 0.57
JPY per USD (JPY:USD) 118.65 - 9.17 119.17 0.52
USD per EUR (EUR:USD) 1.1456 - 501 1.1501 0.0045
USD per PHP 0.019212296 0.019004181
USD per JPY 0.00842815 0.008391374
EUR per USD 0.872905028 0.86948961
CHF per USD 0.9375 - 7
USD per GBP 1.3863 - 8
CNY per USD 6.3179 - 218

YEN:PHP 2.279538905
YEN:EUR 135.92544
EUR:PHP 59.62848 60.518262

Percentage Spread = Spread/Ask Price

Narrower Spread = Less Risky, Liquid
Wider Spread = More Risky, No trades

Budget (PESOS) 175,000 2923.356036 EUR:PHP

Peso to Euro 52.62
Euro to Dollar 3325.731661

PROCESS OF GETTING PESO TO EUR

PHP to USD (BID) 52.05
EUR to USD (ASK) 0.86948961
PHP to EUR (Divide) 59.862705

OR

PHP to USD (BID) 52.05

USD to EUR (ASK) 1.1501
PHP to EUR (Multiply) 59.862705

BUDGET (EURO) 1750

USD TO EURO
JPY TO USD

PROCESS OF GETTING EURO TO JPY

USD per EURO (BID) 1.1456
JPY per USD (ASK) 119.17
CROSS RATES PART 2
(LEFT SIDE IS DENOMINATOR) Bid ASK
PHP per USD (USD:PHP) 52.05 52.62
JPY per GBP (GBP:JPY) 146.512 146.527
USD per EUR (EUR:USD) 1.1456 1.1501
CHF per USD (USD:CHF) 0.9375 0.9377
GBP per EUR (EUR:GBP) 0.89581 0.89592
CNY per USD (USD:CNY) 6.3179 6.3218
PHP:USD
JPY:GBP
USD:EUR
CHF:USD

British Investor to China

Budget (GBP) 1200
From GBP to EUR (ASK) 1339.405304
From EUR to USD (BID) 1534.422716

JPY to CHF
JPY 35,000,000

(ASK KAPAG BIBILIN MO DENOMINATOR)

PHP to GBP
Peso Budget 115,000
PHP to USD (ASK) 52.62 2185.480806
USD to EUR (ASK) 1.1501 1900.252853
EUR to GBP (BID) 0.89581 1702.265508

BID BID ASK ASK

US Dollar per Euro 1.2329 0.81109579 1.2339 0.810438447
Yen per Pound 147.803 0.006765763 147.825 0.006764756
Chinese per USD 6.3204 0.158217834 6.3215 0.158190303
USD per NZD 0.7315 1.367053999 0.7322 1.365747064
USD per AUD 0.7872 1.270325203 0.7881 1.268874508
USD per Pound 1.3872 0.720876586 1.3885 0.720201656
HKD per USD 7.8399 0.127552647 7.8409 0.12753638
#1
AUD per Euro (BID ONLY)
EURO:AUD Divideing EURO/AUD
1.56618394308943

#2 SAME NUMERATOR. First is the denominator and the second is the numerator
GET (WITH BID AND ASK)
EURO:NEW NEW/EURO
BID EURO/ASK NEW 1.683829555 TO GET BID 1.683829555
ASK EURO/BID NEW 1.686807929 TO GET ASK 1.686807929

#3
BID/Ask Same Denominator. Bid to Ask, Ask to Bid. DIVIDE
ASK/BID
HKD per CNY HKD/CNY
Numerator first
BID HKD/ASK CNY To get BID 1.240196156
ASK HKD/BID CNY To get ASK 1.240570217

#4

#5 IF different. USD is numerator and denominator for other. MULTIPLY. BID to BID too.
EURO:CNY
CNY per EURO
BID 7.79242116
ASK 7.80009885
% Spread
0.010832383
0.004363514
0.003912703
EUR:USD USD/EUR EUR/USD
POUND:JPY JPY/POUND POUND/JPY
USD:CHINESE(CNY) CHINESE/USD USD/CHINESE
NEW:USD USD/NEW NEW/USD
AUS:USD USD/AUS AUS/USD
POUND:USD USD/POUND POUND/USD
USD:HKD HKD/USD USD/HKD
 (LEFT SIDE IS DENOMINATOR)
(ASK KAPAG BIBILIN MO DENOMINATOR)

is the numerator

LTIPLY. BID to BID too.

Example Number 1
Year 1 Year 2 Year 2 (% change)
Blue horizon Red electronics Blue horizon Red electronics Blue Red
Volume 200,000 200,000 250,000 250,000 -25%
Sales price 20 20 20 20
Variable cost 7 14 7 14
Fixed Cost 1,000,000 200,000 1,000,000 200,000
Fixed financial expense 800,000 200,000 800,000 200,000

Revenues 4,000,000 4,000,000 5,000,000 5,000,000

Cost of goods 1,400,000 2,800,000 1,750,000 3,500,000
Gross Profit 2,600,000 1,200,000 3,250,000 1,500,000
Fixed Cost 1,000,000 200,000 1,000,000 200,000
EBIT 1,600,000 1,000,000 2,250,000 1,300,000 -40.6250% -30.0000%
Fixed financial expense 800,000 200,000 800,000 200,000
Net Income 800,000 800,000 1,450,000 1,100,000 -81.2500% -37.5000%
-81.2500% -37.5000%

Degree of operating leverage 1.625 1.200

Degree of financial leverage 2.000 1.250
Degree of total leverage 3.250 1.500

Assumption No. 1 150,000

Assumption No. 2 250,000

Example Number 2 Answer for example number 2

Operating earnings 1,000,000 S1 S2 using DFL
Interest rate on debt 6% +50% 975,000 877,500 877,500
Income tax rate 35% Base 650,000 552,500
-50% 325,000 227,500 227,500
Scenario 1
Total assets 5,000,000 S1 S2
Level of debt - +50% 19.50% 35.10%
Base 13.00% 22.10%
Scenario 2 -50% 6.50% 9.10%
Total assets 5,000,000
Debt 50%
Equity 50%

DFL
Scenario 1 1.000
Scenario 2 1.176

Compute for NI under both scenarios and return on equity

Operating earnings can vary +50%, -50%

Example Number 3
Units sold 1,000
Sales price 20
Variable cost 15
DOL 1.25
DFL 2.00

Breakeven number of units point where EBT = 0

Operating breakeven point where EBIT = 0

Degree of operating leverage = Gross Profit

EBIT

Degree of financial leverage = EBIT

EBIT - I - [Pref/(1-TR)]
 1.25 5,000 4,000 1,000 fixed cost
5000 - F

2.00 4,000 2,000 2,000 interest

4000 - I

Breakeven Operating breakeven

Gross profit 3,000 1,000
Fixed cost (1,000) (1,000)
EBIT 2,000 -
Interest expense (2,000) (2,000)
EBT - (2,000)

# of units 600 200

 Year 2 (actual) Year 2 (% change) Year 2 (actual)
Blue Red Blue Red Blue Red
25%

950,000 700,000 40.6250% 30.0000% 2,250,000 1,300,000

150,000 500,000 81.2500% 37.5000% 1,450,000 1,100,000

 SPOT RATE Implied
GBP:JPY 147.803 147.764544
GBP:USD 1.3872 1.3875610214044
USD:JPY 106.52 106.54772202999

Triangular Currency Arbitrage

3 Currencies, 3 Specific Spot Rates

Start where currecy is strong

GBP (POUNDS) 1,000,000

Start converting where the currency is strong
TO JPY 147,803,000.00
TO USD 1,387,561.02
TO GBP 1,000,260.25

JPY 1,000,000
USD 9,387.91
GBP 6,767.52
JPY 1,000,260.25

USD 1,000,000
GBP 720,876.59
JPY 106,547,722.03
USD 1,000,260.25

BID (SELL) ASK (BUY) Compare the lowest ask and the highest bid
BANK A GBP:USD 1.3872 1.3885 Lowest ask is less than the highest bid = arbitrag
BANK B GBP:USD 1.3901 1.3909 Lowest ask is greater than the highest bid = no a
BANK C GBP:USD 1.3881 1.3895
BANK A USD:GBP
BANK B USD:GBP
BANK C USD:GBP

GBP 1,000 GBP 1,000

BANK C 1388.1 BANK B 1390.1
BANK A 999.71191933742 BANK A 1001.152323

USD 1,000 GBP 1,000

BANK A BANK A
BANK C BANK B
est ask and the highest bid
than the highest bid = arbitrage
ter than the highest bid = no arbitrage

GBP 1,000
BANK B 1390.1
BANK C 1000.43181

GBP 1,000
BANK C
BANK B
 -100000 10000 10000 10000 10000 10000

(26,785.39)

AVERAGE ACCOUNTING RATE OF RETURN (AAR)

AAR = Average Net Income/Average Book Value

Daya
0 1 2 3
A -350,000 425,000
B
A B
0 -350,000 -350,000 0
1 425,000 16,000 -409,000
2 0 16,000 16,000
3 0 466,000 466,000
40,930.7047249141 40,930.7047249141 8.714919%

OPTIMAL CAPITAL BUDGET

IF YOU INVEST MORE MONEY RETURNS DROP
IF YOU INVEST COST INCREASES
25,000 25,000 25,000
 Revenue = Price x Quantity
CGS = Varaible Cost x Quantity
Gross Profits = Revenue - CGS
EBIT = Gross Profit - Fixed Cost

EBIT
(Interest)
EBT
(Taxes)
NIAC

Firm that uses a lot of fixed cost will be using a lot of Operating Leverage
Operating Leverage = Business Risk

When the demand is falling it is better if there is a higher Variable Cost than Fixed Cost

Degree of Operating Leverage - % Change EBIT

- if it is higher than 1 it means …. % Change Sales

Degree of Operating Leverage - Qn(P-VC)

Qn(P-VC)-F

Financial Leverage = use of debt

High Financial Leverage = High Debt

High Expected Revenues is okay to have a large Financial Leverage

Degree of Financial Leverage - % Change EPS

% Change EBIT

Degree of Financial Leverage - EBIT

EBIT - I - (Preference Dividends

Degree of Total Leverage - % Change EPS

% Change Sales

1 2 3 1 2
Blue Red
Volume 200,000 150,000 250,000 200,000 150,000
P 20 20 20 20 20
VC 7 7 7 14 14
F 1,000,000 1,000,000 1,000,000 200,000 200,000
I (or Fixed Fin 800,000 800,000 800,000 200,000 200,000

Net Income 800,000 150,000 1,450,000 800,000 500,000

Revenue 4000000 3000000 5000000 4000000 3000000

COGS 1400000 1050000 1750000 2800000 2100000
GROSS 2600000 1950000 3250000 1200000 900000
Fixed Cost 1,000,000 1,000,000 1,000,000 200,000 200,000
EBIT 1,600,000 950,000 2,250,000 1,000,000 700,000
Fixed Financia 800,000 800,000 800,000 200,000 200,000
Net Income 800,000 150,000 1,450,000 800,000 500,000

DOL 1.625 2.052631579 1.444444444 1.2 1.285714286

DFL 2 6.333333333 1.551724138 1.25 1.4
DTL 3.25 13 2.24137931 1.5 1.8
Increase (Decrease) in EBIT -40.6250% 137% -30%
Increase (Decrease) in Net Incom -81.250% 867% -38%
EBIT using Increase (Decrease) in 950000 2250000 700000
Net Income using the Increase (D 150000 1450000 500000

Business Risk = Sales Risks and Operating Risk

Sales Risk = related to demand of product Cannot be controlled by Company

Operating Risk = related to decission on VC vs F Can be controlled by Company

Example Net Income S1 S2

Operating Eari 1,000,000 50% 975000 877500
Interest Rate 6% Base 650000 552500
Income Tax Ra 35% -50% 325000 227500

Scenario 1 Scenario 2 ROE S1 S2

Total Assets 5,000,000 5,000,000 50% 19.500% 35.100%
Level of Debt 0 50% Base 13.000% 22.100%
Level of Equity 100% 50% -50% 6.500% 9.100%

Compute for Net Income under both scenarios and Return on EDFL S1 S2
Operating Earnings can Vary +50% and -50% 50%
Base
-50%

Example #3

Volume 1,000
Price 20
Variable Cost 15
DOL 1.25
DFL 2

Operating Breakeven EBIT = 0

Breakeven # of Units EBT = 0
Revenue 20000
COGS 15000
Gross 5000
F 1000
EBIT 4000
Interest 2000
EBT 2000
Taxes
Net Income 2000
*Mali placement
1. Breakeven # of Units = EBT is 0
EBT = EBIT/DFL 2000
# of Units 600

2. Operating Breakeven = EBIT = 0

EBIT = Gross/D 4000
# of Units 200
 % Change EBIT
% Change Sales

Qn(P-VC) only use if P, VC, and F is constant

Qn(P-VC)-F

% Change EPS
% Change EBIT

EBIT
EBIT - I - (Preference Dividends/(1-TR)

% Change EPS DOC x DFL

OR
% Change Sales

250,000
20
14
 200,000
200,000

1,100,000

5000000
3500000
1500000
200,000
1,300,000
200,000
1,100,000

1.1538461538 DOL = Gross Profit/EBIT This defines the increase or decrease of EBIT
1.1818181818 DFL = EBIT/EBT This defines the Increase or decrease of Net Income
1.3636363636 DTL = DOL x DFL
86%
120%
1300000
1100000
 BID ASK
USD:GBP 0.7217 0.7256
USD:HKD 7.8391 7.8423
USD:JPY 106.53 107.01
USD:SGD 1.3145 1.3201
EUR:USD 1.231 1.2385
USD:CHF 0.9494 0.9499
USD:SEK 8.256 8.2625
USD:DKK 6.0503 6.0587

# 1 - 10 Only Bid

#1 American Quote of the Pound GBP:USD 1.385617293

#2 American Quote of Hongkong Dollar HKD:USD 0.127565664

#3 European Quote of the Yen USD:JPY 106.53

#4 European Quote of the SGD USD:SGD 1.3145

#5 Direct Quote of USD in Germany USD:EUR 0.812347685

#6 Direct Quote of USD in Japan USD:JPY 106.53

#7 Indirect Quote of Euro in Sweden SEK:EUR 0.098394826

#8 Indirect Quote of Swiss in London GBP:CHF 1.315505058

#9 Direct Quote of SEK in HKD SEK:HKD 0.949503391

#10 Indirect Quote of Yen in London GBP:JPY 147.6098102

 USD
20784.25939
24770

USD after Travel 154,446

#14 and #15 How much USD do you need to get the following?
London 15,000.00 GBP 20,784.26
France 20,000.00 EUR 24,770.00
Hongkong 120,000.00 HKD 15,307.88
Japan 500,000.00 JPY 4,693.51
# 11 - 15 BID and ASK #14
USD 200,000
#11 Value In USD
DKK 1,500,000 London GBP 15,000.00 20,784.26
SGD 325441.1012 France EUR 20,000.00 24,770.00
Hongkong HKD 120,000.00 15,307.88
#12 Japan JPY 500,000.00 4,693.51
EUR 800,000
JPY 104910744

#13
GBP 75,000
CHF 98132.57993
GBP:USD 1.385617293

HKD:USD 0.127565664

USD:JPY 106.53

USD:SGD 1.3145

USD:EUR 0.812347685

USD:JPY 106.53

SEK:EURO 10.163136 x

GBP:CHF 1.315505058

SEK:HKD 0.949503391

GBP:JPY 147.6098102
0.098394826
Manufacturer of Consumer Products

Balance Sheet Data

Fixed Assets 4,000 4,000,000,000

Current Assets 1,000 1,000,000,000
Total Debts 2,500 2,500,000,000
Total Equity 2,500 2,500,000,000

Long-term Bonds
MV 80% of Face Value 2,000,000,000.00
COUPON RATE 10%
Selling to yield at 12%

50,000,000 Shares Outstanding 4,000,000,000.00

80 Market Value
4 Dividends
10 Price-Earnings Ratio
1.2 Beta
8% Treasury Bond Rate or RFR
5.50% MRP
40% Tax Rate

DEBT-EQUITY RATIO
BOOK VALUE 1
MARKET VALUE 0.50
TOTAL DEBT RATIO
BOOK VALUE 0.5
MARKET VALUE 0.33 Weights
AFTER TAX COST OF DEBT 7.20% 0.5
COST OF EQUITY 14.600% 0.5
COST OF CAPITAL
BOOK VALUE 10.900%
MARKET VALUE 12.133%

100,000,000 Investment
EBIT 20,000,000
Interest 4,000,000
Taxes 6,400,000
Depreciaton 5,000,000 forever per year
Market Value Based Debt-Equity Ratio 0.50
No principal repayments on the debt
Equity Investor standpoint
Firm standpoint

EBITDA 25,000,000 Relevant Cashflows

Annual Dep 5,000,000 Firm Based Standpoint
EBIT 20,000,000 Initial
Interest 4,000,000 Operating Cashflows
EBT 16,000,000
Taxes 6,400,000.00 NPV
Net Income 9,600,000.00
14,600,000.00 Equity Investor Standpoint
Initial
Operating Cashflow

NPV

MAJOR CHANGE IN CAPITAL STRUCTURE

Option 1
Issue 1,000,000,000 new stock Market Value Net Proceeds
Repurchase half of outstanding Debt
Triple AAA rate firm
Debt Yield 11% in the market

Option 2
Issue 1,000,000,000 new Debt
Repurchase Stock
A- Firm
Debt yield 13% in the market

Option 3
3,000,000,000 New Deb
Buy new Stock
CCC
Debt yield 18% in the market

Compute New Weighted Average Cost of Capital

Option 1 Option 2 Option 3
Debt-Equity Ratio 20% 100% 500%
Unlevered Beta (New D-E 1.07 0.75 0.30
Unlevered Beta (Old D-E R 0.92 0.923076923076923 0.923076923076923
Levered Beta (New D-E Ratio)
Levered Beta (Old D-E Rat 1.03384615384615 1.47692307692308 3.69230769230769
Cost of Equity 13.686153846153800% 16.123076923076900% 28.307692307692300%
Debt Yield 11% 13% 18%
Debt-After Tax 6.600000% 7.800000% 10.800000%
WACC 12.505128205128200% 11.96153846% 13.717949%

Option 2 is optimal because it is the lowset or lower than actual which is 12.3%
Option 1 Option 2
Firm Value 6,000,000,000 6,000,000,000 6,000,000,000
Worth of Debt 2,000,000,000 1,000,000,000 3,000,000,000
Worth of Equity 4,000,000,000 5,000,000,000 3,000,000,000
WACC 12.133% 12.505128205128200% 11.961538461538500%
Change in Value 0.371794871794874% -0.171794871794871%
Additional Cost Incurred per year 22,307,692.31 (10,307,692.31)
Change in Firm Value 178,388,353.50 (86,173,633.44)
New Firm Value 5,821,611,646.50 6,086,173,633.44
New Debt 1,000,000,000 3,000,000,000
New Equity 4,821,611,646.50 3,086,173,633.44
New Shares 62,500,000 37,500,000
New Share Price 77.15 82.30

Relevant info about

Company Competitors
Debt-Equity Ratio 50% 25%
Variance in EBITDA 20% 40%
EBITDA/MARKET VALUE o 25% 15%
Tax Rate 40% 30%
R and D Expense relative 2% 5%
20%
Regression Equation NOTEBOOK
0.33
0.67
 -100,000,000 Peretuity = 17,000,000/Cost of Capital MV - Initial Investment
17,000,000.00
140,109,890.11 Cost of Capital is used
40,109,890.11

or Standpoint
(66,666,666.67)
14,600,000.00
100,000,000.00 Cost of Equity is used
33,333,333.33

Weights
New Debt 1,000,000,000 6,000,000,000 0.166666667
New Equity 5,000,000,000 0.833333333

Weights
New Debt 3,000,000,000 0.5
New Equity 3,000,000,000 0.5

Weights
New Debt 5,000,000,000 0.833333333
New Equity 1,000,000,000 0.166666667
Option 3
6,000,000,000
5,000,000,000
1,000,000,000
13.717948717948700%
1.584615384615380%
95,076,923.08
693,084,112.15 Positive = Decrease Negative = Increase
5,306,915,887.85
5,000,000,000
306,915,887.85
12,500,000
24.55

Relevant Indication to point out Debt-Equity Ratio

Volatility in EBITDA LEVEL
Relevant
PROBLEM 1 - PDF March 21, 2018

Corporation = BBB
Shares Outstanding 10,000,000
Market Price 50
Equity (MV) 500,000,000.00
Debt (MV) 200,000,000.00
Beta 1.5
Treasury Bond Rate 8%
Tax Rate 46%
Debt-Equity Ratio 40%
Unlevered Beta 1.233552631579
Debt Equity
Weights 0.29 0.71
Debt After-tax 0.0594
Cost of Equity 16.2500%
WACC 13.3043%

WACC New
Debt Equity D-E Ratio
Weights 37.5000% 62.5000% 0.6
Cost 6.75% 16.9827% 1.633223684
WACC New 2.531250% 10.614206% 13.145456%

Difference -0.158829%
A 0.0015882929981
Additional Cost 1,111,805.10
Change in Firm Value 8,457,713.93 ds

WACC
Weight
Cost of Equity 12% 2,000,000.00 0.8 0.0986
Debt 10%
After 0.06 500,000 0.2 0.012
11.060%
Real
0 1 2 3
Inflation Rate 3.0000% 2.5000% 4.0000%
Revenue Growth (Real) 10.0000% 10.0000% 10.0000%
CGS Growth (real) 8.0000% 8.0000% 8.0000%
Market Growth Real #VALUE! #VALUE!
Utilities Growth 1.9417% 1.9417% 1.9417%
Maintainance (real) 4.0000% 4.0000% 4.0000%
Tax Rate 40.0000% 40.0000% 40.0000%
Depreciation 60000

Revenue 500000 550000 605000

CGS -200000 -216000 -233280
Gross Profit 300000 334000 371720
Marketing 100,000 97087.37864 #VALUE! #VALUE!
Utilities 50,000 48543.68932
Maintanance
EBITDA
Depreciation 58252.42718 56831.63628 54645.804113

Nominal 0 1 2 3
Inflation Rates 3.0000% 2.5000% 4.0000%
103.0000% 102.5000% 104.0000%
103.0000% 105.57500% 109.79800%
Discount Rate 1.1 1.133 1.1275 1.144
1.133 1.2774575 1.46141138
Investment (300,000.00)
Working Capital (60,000.00) (10,300.00) (21,115.00) (40,000.00)
Revenues 515,000.00 580,662.50 664,277.90
COGS 206000 228042 256136.7744
Gross Profit 309,000.00 352,620.50 408,141.13
Marketing Expense -100,000 -94000 -88360
Utilities -50000 -51000 -52020
Maintainance -30000 -31980 -34589.568
Operating Expense 129,000.00 175,640.50 233,171.56
Depreciation Expense 60,000 60,000 60,000
EBIT 69,000.00 115,640.50 173,171.56
NOPAT 41,400.00 69,384.30 103,902.93
Depreciation Expense 60,000 60,000 60,000
101,400.00 129,384.30 163,902.93
Reversal
(360,000.00) 91,100.00 108,269.30 123,902.93
Gain on Sale
Cash Flows (360,000.00) 91,100.00 108,269.30 123,902.93
(360,000.00) 80,406.00 84,753.74 84,783.06
NPV 213,376.77
 4 5
2.0000% 1.5000%
10.0000% 10.0000%
8.0000% 8.0000%
#VALUE! #VALUE!
1.9417% 1.9417%
4.0000% 4.0000%
40.0000% 40.0000%

665500 732050
-251942.4 -272097.792
413557.6 459952.208
#VALUE! #VALUE!

53574.3177579 52782.5790718

4 5
2.0000% 1.5000%
102.0000% 101.5000%
111.99396% 113.67387%
1.122 1.1165
1.63970356836 1.83072903407

(20,000.00) 140,000.00
745,319.80 832,149.56
282160.270679 309304.088718
463,159.53 522,845.47
-83058.4 -78074.896
-53060.4 -54121.608
-36692.613734 -38732.723058
290,348.12 351,916.25
60,000 60,000
230,348.12 291,916.25
138,208.87 175,149.75
 60,000 60,000
198,208.87 235,149.75

178,208.87 375,149.75
18000
178,208.87 393,149.75
108,683.59 214,750.38
Perfect Market
Ideal World View
Perfect competition
No transaction costs
No Taxes
Information Flows Freely
Information is Free

If taxes do not exist, Capital Structure is irrelevant

Value of Levered Firm = Value of Unlevered Firm

WACC = Cost firm needs to generate = ra = cost of debt (rd)x(weight) + cost of equity (re)

Example
Company
Considering Borrowing 85,000,000
Marginal Tax Rate 34%
Interest Expense 6,800,000 annually
8.000% 5.2800%

#2
New Debt 500,000,000
Cost of Capital (WAC 13%
D-E Ratio 50%
Cost of Debt 9%
Tax Rate 32%

Without Tax With Tax

15% 16%

#3
3,000,000,000 Cost of Equity Cost of Borrowing
0 debt 15% 0%
50% Debt 18% 12%
80% 24% 16%
Tax 35%
1 2% 3%
WACC 15% 0.129 0.1312
0.09
0.078
0.039
0.129

#4 Unlevered Buying Back of Equity.

EBIT 2,000,000 per year
Tax Rate 40%
Market Value of Firm 12,000,000
Beta 1
RFR 9%
MRP 1%
Cost of Equity 10.0%
Default Interest Rate 12%
To buy back shares
Current Bankruptcy C 8,000,000
Increases with leverage Probability of Bankruptcy Cost Marginal Benefit in Level of Debt
2,500,000 0% 0 1,000,000.00
5,000,000 8% 640,000.00 1,000,000.00
7,500,000 20.50% 1,640,000.00 1,000,000.00
8,000,000 30% 2,400,000.00 200,000.00
9,000,000 45% 3,600,000.00 400,000.00
10,000,000 52.50% 4,200,000.00 400,000.00
12,500,000 70% 5,600,000.00 1,000,000.00

Value of Levered
No Debt
NOPAT 1,200,000.00
WACC 10.0%
Vl 12,000,000.00
 Weight
0.072 0.384615385 0.027692308
 0 1 2
Debt 100,000,000 100,000,000 100,000,000
Equity 900,000,000 1003950000 1119722414.0625
Total Debt Ratio 10.00000% 9.05838% 8.19859%
Debt-Equity Ratio 11.11111% 9.96066% 8.93078%
Net income 67500000 74250000 81675000
Dividends 13500000 14850000 16335000

Expected Return 13.0500% 13.0108% 12.9758%

Dividend Yield 1.5000% 1.4792% 1.4588%
Expected Price Yield 11.5500% 11.5317% 11.5170%
Beta 1.1 1.0928815553564 1.0865092314157
# of Shares 9,000,000
EPS 7.5
Earnings Growth Rate 10% 10% 10%
Tax Rate 40% 40% 40%
Payout Rate 20% 20% 20%
Treasury Bond Rate 7% 7% 7%
Market Risk Premium 5.50% 5.50% 5.50%
Interest Rate 8% 8% 8%
Unlevered Beta 1.03125 1.03125 1.03125

0 1 2
Debt 100,000,000 149,522,500 201,299,955
Equity 900,000,000 940,927,500.00 983,771,639.51
Total Debt Ratio 10.00000% 13.71200% 16.98631%
Debt-Equity Ratio 11.11111% 15.89097% 20.46206%
Net income 67500000 74250000 81675000
Dividends 27000000 29700000 32670000

Expected Return 13.0500% 13.2127% 13.3682%

Dividend Yield 3.0000% 3.1565% 3.3209%
Expected Price Yield 10.0500% 10.0562% 10.0473%
Beta 1.1 1.1295753724384 1.1578590035282
# of Shares 9,000,000
EPS 7.5
Earnings Growth Rate 10% 10% 10%
Tax Rate 40% 40% 40%
Payout Rate 40% 40% 40%
Treasury Bond Rate 7% 7% 7%
Market Risk Premium 5.50% 5.50% 5.50%
Interest Rate 8% 8% 8%
Unlevered Beta 1.03125 1.03125 1.03125
Buyback Rate 5% 5% 5%
Stock Buyback 49,522,500.00 51,777,454.71

*RIGHT!!!!!!! *If BUY BACK NO RESTRUCTURING!!!!!!

0 1 2
Debt 100,000,000 100,000,000 100,000,000
Equity 900,000,000 940,927,500.00 982,170,592.56
Total Debt Ratio 10.00000% 9.60682% 9.24069%
Debt-Equity Ratio 11.11111% 10.62781% 10.18153%
Net income 67500000 74250000 81675000
Dividends 27000000 29700000 32670000
ROE 7.500000% 7.891150% 8.315765%

Expected Return 13.0500% 13.0336% 13.0184%

Dividend Yield 3.0000% 3.1565% 3.3263%
Expected Price Yield 10.0500% 9.8771% 9.6921%
Beta 1.1 1.0970095829647 1.0942482209494
# of Shares 9,000,000
EPS 7.5
Earnings Growth Rate 10% 10% 10%
Tax Rate 40% 40% 40%
Payout Rate 40% 40% 40%
Treasury Bond Rate 7% 7% 7%
Market Risk Premium 5.50% 5.50% 5.50%
Interest Rate 8% 8% 8%
Unlevered Beta 1.03125 1.03125 1.03125
Buyback Rate 5% 5% 5%
Stock Buyback 49,522,500.00 51,693,189.08

*ER is bigger than

*Dividend Policy not covered

*No Sensitivity Analysis
*No Scenario Analysis
*Real Options
*WACC
*Value computations of Firms
*No Arbitrage
*ESSAY
 3 4 5
100,000,000 100,000,000 100,000,000 *Company has no target of Debt Ratio
1248680363.71948 1392346203.55956 1552420349.04187 *This results in a decreasing ER, Divid
7.41466% 6.70086% 6.05173%
8.00845% 7.18212% 6.44155%
89842500 98826750 108709425
17968500 19765350 21741885

12.9444% 12.9163% 12.8911%

1.4390% 1.4196% 1.4005%
11.5054% 11.4967% 11.4906%
1.08080231282383 1.07568937854092 1.07110711733178

10% 10% 10%

40% 40% 40%
20% 20% 20%
7% 7% 7%
5.50% 5.50% 5.50%
8% 8% 8%
1.03125 1.03125 1.03125

Buyback end of year 1

3 4 5
255,430,677 312,009,053 371,123,941 Debt
1,028,483,718.98 1,074,989,139.69 1,123,182,888.92 Equity
19.89468% 22.49527% 24.83586% Total Debt Ratio
24.83566% 29.02439% 33.04216% Debt-Equity Ratio
89842500 98826750 108709425 Net income
35937000 39530700 43483770 Dividends

13.5171% 13.6596% 13.7963% Expected Return

3.4942% 3.6773% 3.8715% Dividend Yield
10.0229% 9.9823% 9.9249% Expected Price Yield
1.18492062047721 1.21083842013201 1.23569839484586 Beta
# of Shares
EPS
10% 10% 10% Earnings Growth Rate
40% 40% 40% Tax Rate
40% 40% 40% Payout Rate
 7% 7% 7% Treasury Bond Rate
5.50% 5.50% 5.50% Market Risk Premium
8% 8% 8% Interest Rate
1.03125 1.03125 1.03125 Unlevered Beta
5% 5% 5% Buyback Rate
54,130,722.05 56,578,375.77 59,114,888.89 Stock Buyback

3 4 5 Buyback end of year 1

100,000,000 100,000,000 100,000,000
1,023,494,989.97 1,064,624,264.69 1,105,234,318.45 Debt
8.90080% 8.58646% 8.29714% Equity
9.77044% 9.39299% 9.04786% Total Debt Ratio
89842500 98826750 108709425 Debt-Equity Ratio
35937000 39530700 43483770 Net income
8.778011% 9.282782% 9.835871% Dividends

13.0044% 12.9915% 12.9798% Expected Return

3.5112% 3.7131% 3.9343% Dividend Yield
9.4932% 9.2784% 9.0454% Expected Price Yield
1.09170461932545 1.08936909614698 1.08723360362805 Beta
# of Shares
EPS
10% 10% 10% Earnings Growth Rate
40% 40% 40% Tax Rate
40% 40% 40% Payout Rate
7% 7% 7% Treasury Bond Rate
5.50% 5.50% 5.50% Market Risk Premium
8% 8% 8% Interest Rate
1.03125 1.03125 1.03125 Unlevered Beta
5% 5% 5% Buyback Rate
53,868,157.37 56,032,856.04 58,170,227.29 Stock Buyback
no target of Debt Ratio
a decreasing ER, Divid

yback end of year 1

0 1 2 3
100,000,000 100,000,000 149,522,500.00 201,546,561.25
900,000,000 990,450,000.00 1,040,481,225.00 1,091,569,963.61
tal Debt Ratio 10.00000% 9.17053% 12.56488% 15.58611%
ebt-Equity Ratio 11.11111% 10.09642% 14.37051% 18.46392%
67500000 74250000 81675000 89842500
27000000 29700000 32670000 35937000

pected Return 13.0500% 13.0500% 13.0500% 13.0500%

vidend Yield 3.0000% 2.9986% 3.1399% 3.2922%
pected Price Yield 10.0500% 10.0514% 9.9101% 9.7578%
1.1 1.1 1.1 1.1
9,000,000 9,000,000 9,000,000 9,000,000
7.5 7.5 7.5 7.5
rnings Growth Rate 10% 10% 10% 10%
40% 40% 40% 40%
40% 40% 40% 40%
easury Bond Rate 7% 7% 7% 7%
arket Risk Premium 5.50% 5.50% 5.50% 5.50%
terest Rate 8% 8% 8% 8%
nlevered Beta 1.03125 1.0371697843781 1.01268332100913 0.99029199111584
yback Rate 5% 5% 5% 5%
ock Buyback 49,522,500.00 52,024,061.25

yback end of year 1

0 1 2 3
100,000,000 100,000,000 100,000,000 100,000,000
900,000,000 990,450,000.00 1,040,481,225.00 1,091,569,963.61
tal Debt Ratio 10.00000% 9.17053% 8.76823% 8.39229%
ebt-Equity Ratio 11.11111% 10.09642% 9.61094% 9.16112%
67500000 74250000 81675000 89842500
27000000 29700000 32670000 35937000

pected Return 13.0500% 13.0500% 13.0500% 13.0500%

vidend Yield 3.0000% 2.9986% 3.1399% 3.2922%
pected Price Yield 10.0500% 10.0514% 9.9101% 9.7578%
1.1 1.1 1.1 1.1
9,000,000 9,000,000 9,000,000 9,000,000
7.5 7.5 7.5 7.5
rnings Growth Rate 10% 10% 10% 10%
40% 40% 40% 40%
40% 40% 40% 40%
easury Bond Rate 7% 7% 7% 7%
arket Risk Premium 5.50% 5.50% 5.50% 5.50%
terest Rate 8% 8% 8% 8%
nlevered Beta 1.03125 1.0371697843781 1.0400262371582 1.04268693862685
yback Rate 5% 5% 5% 5%
ock Buyback 49,522,500.00 52,024,061.25
 4 5
256,125,059.43 313,300,276.71
1,143,504,345.68 1,196,025,745.51
18.29949% 20.75763%
22.39826% 26.19511%
98826750 108709425
39530700 43483770

13.0500% 13.0500%
3.4570% 3.6357%
9.5930% 9.4143%
1.1 1.1
9,000,000 9,000,000
7.5 7.5
10% 10%
40% 40%
40% 40%
 7% 7%
5.50% 5.50%
8% 8%
0.9696845311792 0.95059443683899
5% 5%
54,578,498.18 57,175,217.28

4 5
100,000,000 100,000,000
1,143,504,345.68 1,196,025,745.51
8.04179% 7.71590%
8.74505% 8.36102%
98826750 108709425
39530700 43483770

13.0500% 13.0500%
3.4570% 3.6357%
9.5930% 9.4143%
1.1 1.1
9,000,000 9,000,000
7.5 7.5
10% 10%
40% 40%
40% 40%
7% 7%
5.50% 5.50%
8% 8%
1.04516014816504 1.04745330640244
5% 5%
54,578,498.18 57,175,217.28
Problems.pdf 4 Pages April 4 2018

Problem 1
Pfizer

1995
MV of Equity 24,270,000,000
MV of Debt 2,800,000,000
Rating AAA
Beta 1.47
Tax Rate 40%
Treasury Bond Rate 6.50%
Yield Spread 0.30%
Bond Rate 6.80%
Market Risk Premium 5.50%

a. Estimate the current Cost of Capital for Pfizer

Weight
Equity 89.656%
Debt 10.344%

Debt-Equity Ratio 11.5369%

Total Debt Ratio 10.344%

Cost of Equity 14.58500%

Cost of Debt 0.0408

WACC 13.49840967861100000000%

B.
Debt-Ratio 30%
Rating BBB
Yield Spread 2%
Debt Ratio 8.500%
Treasury Bond Rate 6.50%
Weight
Debt 30%
Equity 0.7

Unleveraged Beta 1.3748323699422

Beta New 1.72836069364162
Cost of Equity 16.005983815028900%
Cost of Debt 5.10000%

WACC 12.734189%

C.