FINC 5880 “EMH and Capital Structure ” “EMH and Capital Structure ” Shanghai 2015 Week 1 邦保罗 Only for Pro’s.

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Presentation transcript:

FINC 5880 “EMH and Capital Structure ” “EMH and Capital Structure ” Shanghai 2015 Week 1 邦保罗 Only for Pro’s

Help file How to optimize the WACC% (how much debt should the company take on?)How to optimize the WACC% (how much debt should the company take on?) How to get started with strategic analysis of your companyHow to get started with strategic analysis of your company You are starting to feel excited?

Look at Disney

The Process

Source: Damodaran…

In 1996:

Start with actual performance

Ks% at different debt ratio’s

Beta and Ks% at different debt ratio’s

Estimate cost of debt at each level of debt…

From 10%-90%

Like this…

Beware of tax implications

Debt % and Kd%

So find minimum WACC%

You found best Debt ratio around 40%

Note on ratings…

Cost of rating constraint:

Different rating constraints

“That was not too bad”

All Beta’s are levered.. All beta’s we calculated are from companies with LT debtAll beta’s we calculated are from companies with LT debt They are so called Levered Beta’sThey are so called Levered Beta’s Only if a company has NO debt (Microsoft) the levered beta=unlevered betaOnly if a company has NO debt (Microsoft) the levered beta=unlevered beta So we can calculate all companies beta’s assuming that LT debt is zero, 10%, 20% etc….So we can calculate all companies beta’s assuming that LT debt is zero, 10%, 20% etc…. You can imagine what happens if the debt ratio is 90% or more….You can imagine what happens if the debt ratio is 90% or more….

Levered and unlevered Beta’s How does the Debt ratio of a company effects the beta and Ks?How does the Debt ratio of a company effects the beta and Ks? Through the “financial leverage” (D/E ratio)Through the “financial leverage” (D/E ratio) We can calculate the effect on Beta from the Debt ratio…We can calculate the effect on Beta from the Debt ratio… The higher D/E the higher the beta for a companyThe higher D/E the higher the beta for a company Let’s take a look at the Hamada formula:Let’s take a look at the Hamada formula:

Hamada and Disney Levered Beta= Unlevered Beta*(1+(1- t%)*D/E)Levered Beta= Unlevered Beta*(1+(1- t%)*D/E) Unlevered Beta= Levered Beta/(1+(1- t%)*D/E)Unlevered Beta= Levered Beta/(1+(1- t%)*D/E) My Beta ???

How are you?

Today What a ride…

Your assignment: Consider your company’s WACC Follow the attached searching process Do this for your company Put all in an Excel spread sheet Make the output look exactly like in attached PPT for your company Use FY2014 or any last relevant year…

Class Assignment The last 30 minutes or so we will do a relevant class exercise!