Calculating the Cost of Capital MGT 4850 Spring 2009 University of Lethbridge.

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Presentation transcript:

Calculating the Cost of Capital MGT 4850 Spring 2009 University of Lethbridge

Introduction DCF models using accounting statements to calculate free cash flows The Gordon model –cost of equity based on dividends The Capital Asset Pricing Model The cost of debt WACC RADR

Gordon Model with constant Growth Rate Cost of equity

Cost of Equity p.42

Cost of Equity KELLOGG p.43

Kellogg p.44

All Cash Flows to Equity

Gordon Model with all cash flows

Dividend per share p.47

Supernormal growth 2 growth rates Formula doesn't work

Supernormal growth Calculate share price as DCF (dividends and share price at point 5

Calculating Cost of Equity Choosing the growth rate

Capital Asset Pricing Model Calculating beta of stock returns 125 monthly returns for SP500 and stock A Regression analysis Beta using variance/covariance matrix

CAPM cost of capital

Setting the regression in Excel (58)

OUTPUT (p. 58)

Regression graph (p. 54)

Cost of Debt (p.67)

Yield Curve (p.69)

WACC (p.73) COMPUTING THE WACC FOR KRAFT Shares outstanding1,669,880,755 Share price, end Equity value, E46,339,190,951 Net debt, D10,884,000,000 WACC based on Gordon per-share dividends and interest from financial statements Cost of equity, r E 16.79%<-- ='Page 71'!B6 Cost of debt, r D 5.50%<-- ='Page 67'!B13 Tax rate, T C 29.37%<-- ='Kraft 10K, 2005'!B160 WACC14.33%<-- =$B$4/($B$4+$B$5)*B8+$B$5/($B$4+$B$5)*B9*(1-$B$10) WACC based on Gordon equity payouts and interest from financial statements Cost of equity, r E 14.46%<-- ='Page 72, top'!B11 Cost of debt, r D 5.50%<-- ='Page 67'!B13 Tax rate, T C 29.37%<-- ='Kraft 10K, 2005'!B160 WACC12.45% <-- =$B$4/($B$4+$B$5)*B14+$B$5/($B$4+$B$5)*B15*(1- $B$10) WACC based on classic CAPM and interest from financial statements Cost of equity, r E 6.82%<-- ='Page 72, bottom'!B12 Cost of debt, r D 5.50%<-- ='Page 67'!B13 Tax rate, T C 29.37%<-- ='Kraft 10K, 2005'!B160 WACC6.26% <-- =$B$4/($B$4+$B$5)*B20+$B$5/($B$4+$B$5)*B21*(1- $B$10) WACC based on tax-adjusted CAPM and interest from financial statements Cost of equity, r E 6.05%<-- ='Page 72, bottom'!B13 Cost of debt, r D 5.50%<-- ='Page 67'!B13 Tax rate, T C 29.37%<-- ='Kraft 10K, 2005'!B160 WACC5.64% <-- =$B$4/($B$4+$B$5)*B26+$B$5/($B$4+$B$5)*B27*(1- $B$10)

Using SML to calculate cost of equity Beta as a measure of market risk Regression analysis Covariance of stock returns with market returns