Session 6 Estimating cost of debt, debt ratios and cost
wacc_精品文档
waccWACC: Understanding the Weighted Average Cost of CapitalIntroductionIn the world of finance, understanding and calculating the Weighted Average Cost of Capital (WACC) is vital for making key financial decisions. WACC is a critical component in determining the financial viability of an investment or project. This document aims to provide a comprehensive understanding of WACC, its importance, and how to calculate it.1. What is WACC?WACC is a financial metric used to determine the minimum return rate that a company must earn on its existing assets to satisfy its shareholders and debt holders. It is an important tool for evaluating investment projects, mergers and acquisitions, as well as determining the overall financial health and performance of a company. By calculating and understanding WACC, managers can make informeddecisions about capital structure, project feasibility, and the acceptance or rejection of investment opportunities.2. Components of WACCWACC is composed of two major components: the cost of equity and the cost of debt. These components are weighted based on their proportion in the company's capital structure.2.1 Cost of EquityThe cost of equity represents the return required by the company's shareholders or equity investors. This cost is influenced by various factors such as the company's risk profile, market conditions, and expected return on investment. Common methods for estimating the cost of equity include the Capital Asset Pricing Model (CAPM) and the Dividend Discount Model (DDM).2.2 Cost of DebtThe cost of debt refers to the interest expense incurred by the company on its outstanding debt. This cost is influencedby interest rates, creditworthiness, and other market factors. To calculate the cost of debt, one must consider both the current market interest rates and the company's specific borrowing costs.3. Weighting the ComponentsAfter determining the cost of equity and the cost of debt, these components are weighted based on their proportion in the company's capital structure. The weights reflect the percentage of each component relative to the total capital invested in the business. The formula for calculating WACC is as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)Where:E = Market value of equityV = Total market value of equity and debtRe = Cost of equityD = Market value of debtRd = Cost of debtTc = Corporate tax rate4. Importance of WACCUnderstanding WACC is crucial for several reasons:4.1 Project EvaluationWACC is used to evaluate the financial viability of investment projects. By comparing the project's expected return with the calculated WACC, managers can determine whether the investment will generate sufficient returns to satisfy shareholders and debt holders.4.2 Capital Structure Decision MakingWACC helps in making decisions related to the company's capital structure. By considering the impact of different capital structures on WACC, managers can determine the optimal mix of equity and debt financing. This decision can have a significant impact on the company's overall cost of capital and ultimately affect its profitability.4.3 Valuation and Acquisition AnalysisWACC is used in business valuations and acquisition analyses. By discounting the projected future cash flows at the company's WACC, analysts can estimate the fair value of the business. Similarly, WACC is used to determine the financial feasibility and profitability of potential acquisition targets.ConclusionIn conclusion, WACC is a powerful financial metric used to determine the minimum return rate that a company must earn to satisfy its shareholders and debt holders. It is a critical component in evaluating investment projects, determining capital structure decisions, and conducting valuation and acquisition analyses. By understanding and calculating WACC accurately, managers can make informed decisions that contribute to the financial health and success of the company.。
财务英语试题及答案
财务英语试题及答案一、选择题（每题2分，共20分）1. What is the term for the process of recording, summarizing, and reporting financial transactions?A. BudgetingB. AccountingC. AuditingD. Forecasting答案：B2. Which of the following is a financial statement that showsa company's financial position at a specific point in time?A. Income StatementB. Balance SheetC. Cash Flow StatementD. Statement of Retained Earnings答案：B3. The difference between the purchase price and the fair market value of an asset is known as:A. DepreciationB. AmortizationC. GoodwillD. Capital Gains答案：C4. What is the term for the systematic allocation of the cost of a tangible asset over its useful life?A. DepreciationB. AmortizationC. AccrualD. Provision答案：A5. Which of the following is not a type of revenue recognition?A. Cash basisB. Accrual basisC. Installment methodD. All of the above答案：D6. The process of estimating the cost of completing a project is known as:A. BudgetingB. Cost estimationC. Project managementD. Cost accounting答案：B7. Which of the following is a non-current liability?A. Accounts payableB. Wages payableC. Long-term debtD. Income tax payable答案：C8. The term used to describe the process of adjusting the accounts at the end of an accounting period is:A. Closing the booksB. JournalizingC. PostingD. Adjusting entries答案：D9. What is the term for the financial statement that shows the changes in equity of a company over a period of time?A. Balance SheetB. Income StatementC. Statement of Changes in EquityD. Cash Flow Statement答案：C10. The process of verifying the accuracy of financial records is known as:A. BudgetingB. AuditingC. ForecastingD. Valuation答案：B二、填空题（每空1分，共10分）1. The __________ is the process of determining the value of an asset or liability.答案：valuation2. A __________ is a type of financial instrument that represents a creditor's claim on a company's assets.答案：bond3. The __________ is the difference between the cost of an asset and its depreciation.答案：book value4. __________ is the process of converting non-cash items into cash equivalents.答案：Liquidation5. A __________ is a financial statement that provides information about a company's cash inflows and outflows during a specific period.答案：Cash Flow Statement6. The __________ is the process of estimating the useful life of an asset.答案：depreciation schedule7. __________ is the practice of recording revenues and expenses when they are earned or incurred, not when cash is received or paid.答案：Accrual accounting8. __________ is the process of recording transactions in the order they are received.答案：Journalizing9. __________ is the practice of matching expenses with the revenues they helped to generate.答案：Matching principle10. A __________ is a document that provides evidence of a transaction.答案：voucher三、简答题（每题5分，共20分）1. What are the main components of a balance sheet?答案：The main components of a balance sheet are assets, liabilities, and equity.2. Explain the concept of "double-entry bookkeeping."答案：Double-entry bookkeeping is a system of recording financial transactions in which every entry to an account requires a corresponding and opposite entry to another account, ensuring that the total of debits equals the total of credits.3. What is the purpose of an income statement?答案：The purpose of an income statement is to summarize a company's revenues, expenses, and profits or losses over a specific period of time.4. Describe the role of a financial controller in anorganization.答案：A financial controller is responsible for overseeing the financial operations of an organization, including budgeting, financial reporting, and ensuring compliance with financial regulations and policies.四、论述题（每题15分，共30分）1. Discuss the importance of financial planning in business management.答案：Financial planning is crucial in business management as it helps in setting financial goals。
财务规划方案 英文
Financial Planning StrategyIntroductionFinancial planning plays a critical role in ensuring a secure financial future for individuals and businesses. It involves evaluating the current financial status, setting financial goals, and developing strategies to achieve those goals. In this document, we will discuss a comprehensive financial planning strategy that can be implemented to achieve long-term financial success.1. Assessing Current Financial StatusThe first step in creating a financial plan is to assess the current financial status. This includes evaluating income, expenses, assets, and liabilities. By understanding these factors, individuals or businesses can gain a clear picture of their financial standing.2. Setting Financial GoalsOnce the current financial status is assessed, the next step is to set financial goals. Financial goals can vary depending on individual or business needs and aspirations. They may include short-term goals like saving for a vacation or long-term goals like retirement planning or funding a child’s education.3. Creating a BudgetCreating a budget is an essential part of any financial planning strategy. A budget helps in tracking income and expenses, and ensures financial resources are allocated efficiently. It is important to prioritize expenses based on the financial goals set earlier.4. Emergency FundBuilding an emergency fund is crucial to handle unexpected expenses or emergencies. An emergency fund typically covers 3-6 months of living expenses. This provides a safety net to individuals or businesses during challenging times and helps avoid accumulating debt.5. Debt ManagementManaging debt is an integral part of financial planning. It is essential to evaluate existing debts, such as loans or credit card debt, and develop a plan to pay them off effectively. Minimizing or eliminating high-interest debts should be a priority to improve the overall financial situation.6. Investment StrategyDeveloping an investment strategy is vital for achieving long-term financial goals. It involves determining risk tolerance, understanding investment options, and creating a diversified portfolio. Investments can include stocks, bonds, real estate, mutual funds, or other suitable investment vehicles.7. Retirement PlanningRetirement planning is crucial to ensure financial stability during retirement years. It involves estimating retirement needs, considering pension plans or retirement accounts, and determining contribution amounts. Starting early and regularly reviewing the retirement plan can help ensure a comfortable retirement.8. Insurance CoverageInsurance coverage is an important aspect of financial planning. It protects individuals or businesses from unforeseen events or emergencies. Adequate insurance coverage, such as life insurance, health insurance, property insurance, or business insurance, should be considered to mitigate risks.9. Tax PlanningEfficient tax planning can help minimize tax liabilities and maximize savings. It is essential to stay updated with tax laws, deductions, and credits applicable to individuals or businesses. Consulting with a tax professional can provide valuable guidance in optimizing tax planning strategies.10. Regular Monitoring and ReviewFinancial planning should not be a one-time activity. It is crucial to regularly monitor and review the financial plan. Life circumstances, financial goals, or market conditions may change over time, necessitating adjustments to the financial plan. Regular reviews help keep the plan on track and ensure alignment with evolving needs and objectives.ConclusionA comprehensive financial planning strategy involves assessing the current financial status, setting clear goals, creating a budget, building an emergency fund, managing debt, developing an investment strategy, planning for retirement, obtaining adequate insurance coverage, efficient tax planning, and regular monitoring and review. By following this strategy, individuals or businesses can pave the way for a secure and prosperous financial future.。
Cost_of_Capital
1. Dividend Growth Model
• Value of a share of stock the present value of its expected future cash flow…
D0 1 g D0 1 g D0 1 g D0 1 g P0 1 2 3 1 r 1 r 1 r 1 r
Depending on the availability of data, either of the two models or both can be used to estimate Ke. With two values, the average can be used as the cost of equity. For example, in Kellog’s case, we have
Debt Component
• The cost of debt (Kd) is the rate that firms have to pay when they borrow money • Since interest expenses are tax-deductible, the cost of debt must be adjusted for taxes (t) prior to including it in the WACC calculation:
D0 (1 g ) P0 K e g
where D0 Po g Ke
D0 (1 g ) Ke g P0
= last paid dividend per share; = current market price per share; and = constant growth rate of dividend = cost of equity capital
《公司理财》斯蒂芬A.罗斯..-机械工业出版社-英文课件
7 Net Present VCaolrupeoraantedFinance
Capital Budgeting Ross • Westerfield • Jaffe
Seventh Edition
Seventh Edition
《公司理财》斯蒂芬A.罗斯..-机械工业出版社-英文
《公司理财》斯蒂芬A.罗斯..-机械工业出版社-英文
Cash Flows—Not Accounting Earnings.
• Consider depreciation expense. • You never write a check made out to “depreciation”. • Much of the work in evaluating a project lies in taking accounting
《公司理财》斯蒂芬A.罗斯..-机械工业出版社-英文
Incremental Cash Flows
• Side effects matter. • Erosion and cannibalism are both bad things. If our new product causes existing customers to demand less of current products, we need to recognize that.
Cost of bowling ball machine: $100,000 (depreciated according to ACRS 5-year life).
• Later chapters will deal with the impact that the amount of debt that a firm has in its capital structure has on firm value.
Cost of Capital资金成本
4 Steps to calculate IRR: ① Identify cash flows. From issuer point of view, interest payment should be included net of tax, but from investor point of view, tax is not deducted. ② Estimates the IRR ③ Calculate two NPVs (one –ve and one +ve) ④ Calculate the IRR
The Cost of Equity – ke
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The Cost of Equity – ke
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The Cost of Equity – ke
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The Cost of Equity – ke
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The Cost of Debt – kd
The cost of debt is the rate of return that debt providers require on the funds that they provide. The value of debt is assumed to be the present value of its future cash flows. Features: 1. Debt is tax deductible and hence interest payment are made net of tax 2. Debt is always quoted in $100 nominal units or blocks. 3. Interest paid on the debt is stated as a percentage of nominal value. This is known as coupon rate (not the cost of debt). Interest payable = coupon rate * nominal value of the debt 4. Debt is normally redeemable at par (nominal value) or at a premium or discount. 5. Interest can be either fixed or floating (variable) on borrowings, but bonds normally pay fixed rate interest.
Chapter 16 – Cost of Capital
Earnings Yield Model
Ke = Earnings per share ÷ Price Sometimes used, but
Ignores growth Not based on cash flow
MeanMean-variance CAPM
Ke = Rf + βs,m[E(Rm) - Rf] Where
Cost of Debt
Cost of debt is the interest rate the company would be required to pay on new debt, adjusted upward for flotation costs Yield to maturity on bonds frequently measures the marginal cost of debt
Marginal Cost Concept
The marginal cost of capital is the rate of return that must be earned on new capital to satisfy investors The marginal cost of capital is the weighted average cost of capital that must be earned on new investments The marginal cost of capital is the change in the amount needed to satisfy investors, divided by the amount of new capital raised
超赞的CFA复习笔记(三)——出自高顿财经CFA
IASB conceptual framework of financial report财报的概念性框架：提供关于财报主体的财务信息。
这些信息对当前或潜在投资者、借贷人、债权人在作出对财报主体投资决定时非常有用。
这些决定包括：购置、出售、或者持有权益和债务the statement of comprehensive income综合收入表：报告除权益所有者相互交易外的所有equity changes权益变动。
income statement利润表：报告一个公司在一定期限的financial performance财务表现。
IFRS other comprehensive income可以作为comprehensive income的一局部独立报告也可以将income statement 和comprehensive income分开。
GAAP的公司可以类似处理，但他们可以将comprehensinve income 作为shareholders'equity 的一局部来报告。
footnotes附注：1.讨论基于什么原因给出利润表包含的会计期间和包含的综合实体〔为什么是这个时间跨度〕。
2.给出accounting method会计方法、assumption假设estimates used by management管理的估计。
3.给出一些额外的信息如：business acquisition业务收购、disposal 处置、legal action法律活动，雇员福利方案contigencies偶然性和commitments承诺，4.重要客户关联交易，segments of the firm公司的分布。
SEC要求managements discussion and analysis(MD&A)管理者报告讨论重大事项和不确定因素的trends and identify趋势和确认，这些事项和因素影响到了企业的流动性、资本来源、经营结果。
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• • Straight debt = (4% of $125 million) (PV of annuity, 10 years, 8%) + 125 million/1.0810 = $91.45 million Equity portion = $140 million - $91.45 million = $48.55 million
• • • An arbitrary number, based upon gut feeling and experience An industry average for the industry in which your company operates An “optimal” debt ratio that minimizes your cost of capital
Aswath Damodaran
é 1 ê (1 (1.06)5.38 ; = $14,962 million 5.38 (1.06) ú ú û
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And operating leases…
The pre-tax cost of debt at Disney is 6%.
Disney’s total debt due, in book value terms, on the balance sheet is $16,003 million and the total interest expense for the year was $728 million. Assuming that the maturity that we computed above still holds and using 6% as the pre-tax cost of debt: Estimated MV of Disney Debt =
•
•
Aswath Damodaran
2
Disney: From book value to market value for debt…
In Disney’s 2008 financial statements, the debt due over time was footnoted.
No maturity was given for debt due after 5 years. I assumed 10 years.
Aswath Damodaran
8
Target versus Actual Debt Ratios
The actual debt ratio for a firm reflects what the current management of the firm has chosen as the appropriate debt ratio. To the extent that the managers have either been too conservative or too extreme in the use of debt, the “right” debt ratio for the firm may be different from the actual. To estimate this “right’ or “target” debt ratio, analysts use one of three choices:
Debt outstanding at Disney = MV of Interest bearing Debt + PV of Operating Leases = $14,962 + $ 1,720= $16,682 million
Aswath Damodaran
4
Current Cost of Capital: Disney
Equity
•
• •
Cost of Equity = Riskfree rate + Beta * Risk Premium = 3.5% + 0.9011 (6%) = 8.91% Market Value of Equity = $45.193 Billion Equity/(Debt+Equity ) = 73.04%
After-tax Cost of debt =(Riskfree rate + Default Spread) (1-t) = (3.5%+2.5%) (1-.38) = 3.72% Market Value of Debt = $ 16.682 Billion Debt/(Debt +Equity) = 26.96%
• • • Use the industry average market debt ratio, obtained by looking at publicly traded companies in the sector, to estimate the cost of equity and capital. Use an estimated market value of equity, based upon applying a multiple (say a PE ratio) to your private company’s earnings to arrive at a debt to equity ratio. Use your DCF estimates of equity and debt value to compute your cost of capital. Since you will need the cost of capital to arrive at these estimates, this will create circularity in your valuation. If you are willing to use the iteration function in Excel, you should be still able to work with the circularity.
Session 8: Weights and Cost of Capital Dynamics
Aswath Damodaran
1
Weights for Cost of Capital Calculation
The weights used in the cost of capital computation should be market values. There are three specious arguments used against market value
Aswath Damodaran
6
Decomposing a convertible bond…
Assume that the firm that you are analyzing has $125 million in face value of convertible debt with a stated interest rate of 4%, a 10 year maturity and a market value of $140 million. If the firm has a bond rating of A and the interest rate on A-rated straight bond is 8%, you can break down the value of the convertible bond into straight debt and equity portions.
Aswath Damodaran
7
Debt ratios for private businesses
While the temptation is to go with book values for debt and equity, you should steer away from them. There are three alternatives you can employ.
Debt
• • •
Cost of Capital = 8.91%(.7304)+3.72%(.2696) = 7.51%
45.193/ (45.193+16.682)
Aswath Damodaran
5
Dealing with Hybrids and Preferred Stock
When dealing with hybrids (convertible bonds, for instance), break the security down into debt and equity and allocate the amounts accordingly. Thus, if a firm has $ 125 million in convertible debt outstanding, break the $125 million into straight debt and conversion option components. The conversion option is equity. When dealing with preferred stock, it is better to keep it as a separate component. The cost of preferred stock is the preferred dividend yield.