Corporate Valuation Models 2 by eduCBA Global Online Training Experts

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eduCBA Global Online Training Experts

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... the cost of debt in the future. You must find the company’s future cost of debt for the credit rating implied by the debt-equity mix in your WACC. Method 1: Yield to maturity approach (only for public Debit Determine the Weighted average of current yields to maturity on all issues in the target capital structure. The yield to maturity incorporates the market’s expectations of future returns on debt and should be used instead of the coupon rate Method 2: Credit Rating approach first ...

... Interest Expense Average Debt Cost of Debt=Default spread for ABC company is 3.50% High Market Cap firms. Low Market Cap Firms Interest Coverage Ratio. Rating Spread Interest Coverage Ratio. ...

... the uncertainty about the projected cash stream, the higher the appropriate discount rate and the lower the current value of the cash streams. STEP 6 – EXTRACT THE CAPITAL STRUCTURE FROM ANNUAL REPORT: For calculating the discount rate, we require the proportion of Equity and Debt in the capital structure using our ABC example. For the capital structure calculations, annual reports of ABC have provided us with the following information on Debt and the Equity related items from the footnotes. ...

... ABC needs to repay the amortizing portion of the bond i.e. principal repayment of $12 million within an year. Long term = $80 - $12 = $68 (maturity of more than one year). Short Term = $12 million (amortizing portion, principal repayment). Convertible Bonds: A convertible bond is a type of bond that the holder can convert into shares of common stock in the issuing company or cash of equal value, at an agreed-upon price. It is a hybrid security with debt- and equity-like features. Although it typically has a low coupon rate, the instrument carries additional value through the option to convert the bond to stock, and thereby participate in further growth in the company's equity value. The investor receives the potential upside of conversion into equity while protecting downside with cash flow from the coupon payments. In ABC, the convertible bonds have face value of $100 and a coupon rate of 4.5% ...

... A stock that doesn't have this feature is known as a noncumulative or straight preferred stock and any dividends passed are lost forever if not declared. Convertible Preferred Stocks: These are preferred issues that the holders can exchange for a predetermined number of the company's common stock. This exchange can occur at any time the investor chooses depending on the conversion price. It is a one way deal so one cannot convert the common stock back to preferred stock. In ABC, the face value (FV) of the preferred stock is $18. Each preferred stock converts to one ordinary share at a conversion price of $20. The key to getting WACC correct is to get the capital structure right. ...

... Restrictions on the option (such as vesting and limited transferability) attempt to align the holder's interest with those of the business' shareholders. If the company's stock rises, holders of options generally experience a direct financial benefit. This gives employees an incentive to behave in ways that will boost the company's stock price. Calculating ‘in-the money’ convertible securities. ...

... a company receives from an in-the-money option exercise are used to repurchase common shares in the market. In order to comply with generally accepted accounting principles (GAAP), the treasury stock method must be used by a company when computing its diluted earnings per share (EPS). The net of new shares that are potentially created is calculated by taking the number of shares that the in-the-money options purchase, then subtracting the number of common shares that the company can purchase from the market with the option proceeds. This adds to the total number of shares in the denominator and lowers the EPS number. For example, assume that a company currently has in-the-money options that cover 10,000 shares with an exercise price of $50. If the current market price is $100, the options are in-the-money and, based on the treasury method, need to be added to the diluted EPS denominator. ...

... calculate the effect of stock options on the Equity Base. Use Exchange rate $1=Rs46 STEP 9 - CALCULATION OF THE CAPITAL STRUCTURE...

... Equity Total Capital = 220.0 + 106.4 = 326.4 ...

... This WACC is the weighted average of the after-tax cost of a company’s debt and the cost of its equity. WACC analysis assumes that capital market investors (both debt and equity) in any given industry require returns commensurate with the perceived riskiness of their investment. A simple overview of a company’s WACC calculation can be illustrated by: -There is no charge on the income statement which reflects the cost of equity (as there is interest expense associated with debt). The concept of taxation does not apply to equity? ...