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Chart - Cost of Equity

Cost of Equity and Beta: Debt Ratios

7.00

40.00%

35.00%

6.00

30.00%

5.00
25.00%
4.00
20.00%
3.00
15.00%
2.00
10.00%

1.00

5.00%

0.00

0.00%
0%

10%

20%

30%

40%

50%

60%

Page 1

70%

80%

90%

Beta
Cost of Equity

Debt Ratio
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%

Beta
0.79
0.84
0.89
0.97
1.06
1.20
1.40
1.87
2.94
5.88

Cost of Equity Bond RatingInterest rate on debt


8.63%
AAA
4.54%
8.88%
AAA
4.54%
9.19%
A+
5.24%
9.59%
A5.74%
10.12%
BB
6.74%
10.87%
B9.24%
11.98%
CCC
10.24%
14.60%
CC
11.74%
20.50%
C
13.24%
36.76%
C
13.24%

Tax Rate Cost of Debt (after-tax)


49.08%
2.31%
49.08%
2.31%
49.08%
2.67%
49.08%
2.92%
49.08%
3.43%
49.08%
4.71%
49.08%
5.21%
41.76%
6.84%
32.40%
8.95%
28.80%
9.43%

WACC
8.63%
8.22%
7.89%
7.59%
7.45%
7.79%
7.92%
9.17%
11.26%
12.16%

Firm Value (G)


$45,598
$54,659
$65,095
$77,927
$86,035
$68,933
$63,772
$37,267
$20,942
$17,340

CAPITAL STRUCTURE
When you open this program, you might find a warning about circular references. Before you input any
numbers, go into "options" or "preferences" under "tools", and choose "calculation". Check off the iteration box, if it is
not already chosen.
INPUT SHEET FOR CAPITAL STRUCTURE
Please enter the name of the company you are analyzing: Telecom Italia

Your company's name

Please enter the following information on the company you are analysing:
Earnings before interest, taxes and depreciation (EBITDA)$10,173.00 (in currency)
Depreciation and Amortization:

$5,842.00

(in currency)

Capital Spending:

$7,391.00

(in currency)

$306.00

(in currency)

Current Rating on debt (if available):

AAA

(Rating)

Interest rate based upon rating:

4.44%

(Look up table below for spread)

Tax rate on ordinary income:

49.08%

(in percent)

Number of shares outstanding:

5255

(in units)

Market price per share:

$9.92

(in currency)

Interest expense on debt:

Beta of the stock:


Book value of debt:

0.87
$9,809.00

Can you estimate the market value of the outstanding debt?

No

If so, enter the market value of debt:


Do you want me to try and estimate market value of debt?
If yes, enter the average maturity of outstanding debt?

(in currency)
(Yes or No)
(in currency)

No
(in years)

[If you do not have the maturity of your debt available, enter an approximation - say, 10 years]

17

CAPITAL STRUCTURE

Please enter the following market information:


Current short-term (ST) government rate:

5.00%

(in percent)

Current long-term (LT) government rate:

4.24%

(in percent)

Which rate would you like to use as the riskfree rate in the CAPM?
Risk premium (for use in the CAPM)

5.53%

Please enter the following information for computing ratings/spreads


The following are the defaults used in the program:
If coverage ratio is
greater than

to

Rating is

-100000

0.2499999

12.00%

0.25

0.6699999

9.00%

0.67

0.8699999

CC

7.50%

0.87

1.2699999

CCC

6.00%

1.27

1.5699999

B-

5.00%

1.57

1.8699999

4.00%

1.87

2.1699999

B+

3.00%

2.17

2.7599999

BB

2.50%

2.76

3.2899999

BBB

2.00%

3.29

4.4899999

A-

1.50%

4.49

5.649999

1.25%

5.65

6.849999

A+

1.00%

6.85

9.349999

AA

0.70%

Spread over long bond is

LT
(in percent)

(ST or LT)

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CAPITAL STRUCTURE

9.65

100000

AAA

Do you want to change these defaults?

0.30%

No

(Yes or No)

If you want to change these defaults, please enter the new values below:
If coverage ratio is
greater than

to

Rating is

Spread is

-100000

0.2499999

12.00%

0.25

0.6699999

9.00%

0.67

0.8699999

CC

7.50%

0.87

1.2699999

CCC

6.00%

1.27

1.5699999

B-

5.00%

1.57

1.8699999

4.00%

1.87

2.1699999

B+

3.00%

2.17

2.7599999

BB

2.50%

2.76

3.2899999

BBB

2.00%

3.29

4.4899999

A-

1.50%

4.49

5.649999

1.25%

5.65

6.849999

A+

1.00%

6.85

9.349999

AA

0.70%

9.65

100000

AAA

0.30%

Computational Options
The calculations assume that existing debt is refinanced at the 'recalculated rate' in calculating interest cost.

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CAPITAL STRUCTURE

Do you want to assume that existing debt is refinanced at the 'new' rate?

Yes

(Yes or No)

The rating estimated for the firm at its existing debt ratio may be different from its actual rating.
Do you want the firm's rating to be adjusted to the estimated rating?
No
THE OUTPUT FOLLOWS

(Yes or No)

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CAPITAL STRUCTURE
ANALYZING CAPITAL STRUCTURE
INPUTS FOR ANALYSIS
Capital Structure
Current MV of Equity =
Current Outstanding Debt =
# of Shares Outstanding =
Riskless rate to use in CAPM =
Risk Premium =

$52,130
$9,809
5255
4.24%
5.53%

Financial Market
Current Beta for Stock =
Current Bond Rating =
Current T.Bill Rate =
Current T. Bond Rate =
Current Interest Rate =

RESULTS FROM ANALYSIS


Current
D/(D+E) Ratio =
15.84%

0.87
AAA
5.00%
4.24%
4.44%

Telecom Italia

Income Statement
Current EBITDA =
$10,173
Current Depreciation =
$5,842
Current Tax Rate =
49.08%
Current Capital Spending= $7,391
Current Interest Expense = $306.00

Optimal
40.00%

Change
24.16%

Beta for the Stock =


Cost of Equity =

0.87
9.05%

1.06
10.12%

0.19
1.07%

AT Interest Rate on Debt =

2.26%

3.43%

1.17%

WACC
Implied Growth Rate =

7.98%
6.00%

7.45%

-0.53%

Market Value of Firm (C) = $61,939


Market Value of Firm (G) = $61,939

$66,351
$86,035

$4,413
$24,096

Market Price/share (C) =


Market Price/share (G) =

$10.76
$14.51

$0.84
$4.59

$9.92
$9.92

We use the following default spreads in our analysis. Change them in the input sheet if necessary:
Ratings comparison at current debt ratio
Rating
Coverage gt
and lt
Spread
Current Interest coverage ratio =
14.15
AAA
9.65
100000
0.30%
Rating based upon coverage =
AAA
AA
6.85
9.35
0.70%
Interest rate based upon coverage =
0.0454
A+
5.65
6.849999
1.00%
Current rating for company =
AAA
A
4.49
5.649999
1.25%
Current interest rate on debt =
4.44%
A3.29 4.4899999
1.50%
BBB
2.76 3.2899999
2.00%
BB
2.17 2.7599999
2.50%
B+
1.87 2.1699999
3.00%
B
1.57 1.8699999
4.00%
B1.27 1.5699999
5.00%

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CAPITAL STRUCTURE
CCC
CC
C
D

0.87
0.67
0.25
-100000

1.2699999
0.8699999
0.6699999
0.2499999

6.00%
7.50%
9.00%
12.00%

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CAPITAL STRUCTURE

23

Current beta=
Current Debt=
Tax rate=

0.87
$9,809
49.08%

D/(D+E)
D/E
$ Debt
Beta
Cost of Equity

0.00%
0.00%
$0
0.79
8.63%

10.00%
11.11%
$6,194
0.84
8.88%

EBITDA
Depreciation
EBIT
Interest
Taxable Income
Tax
Net Income
(+)Deprec'n
Funds from Op.

$10,173
$5,842
$4,331
$0
$4,331
$2,126
$2,205
$5,842
$8,047

$10,173
$5,842
$4,331
$281
$4,050
$1,988
$2,062
$5,842
$7,904

$10,173
$5,842
$4,331
$649
$3,682
$1,807
$1,875
$5,842
$7,717

$10,173
$5,842
$4,331
$1,067
$3,264
$1,602
$1,662
$5,842
$7,504

$10,173
$5,842
$4,331
$1,670
$2,661
$1,306
$1,355
$5,842
$7,197

$10,173
$5,842
$4,331
$2,862
$1,469
$721
$748
$5,842
$6,590

$10,173
$5,842
$4,331
$3,806
$525
$258
$268
$5,842
$6,110

Pre-tax Int. cov


Funds Int. Cov
Funds/Debt

15.40
28.11
1.28

6.67
11.89
0.62

4.06
7.04
0.40

2.59
4.31
0.29

1.51
2.30
0.21

AAA
4.54%
49.08%

AAA
4.54%
49.08%

A+
5.24%
49.08%

A5.74%
49.08%

BB
6.74%
49.08%

B9.24%
49.08%

Likely Rating
Interest Rate
Eff. Tax Rate

Current Equity=
Current EBITDA=
Current Rating=

$52,130
$10,173
AAA

Current Depreciation=
Current Interest rate (Company)=
Current T.Bond rate=
Six-month T.Bill rate=
WORKSHEET FOR ESTIMATING RATINGS/INTEREST RATES
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
25.00%
42.86%
66.67%
100.00%
150.00%
233.33%
$12,388
$18,582
$24,775
$30,969
$37,163
$43,357
0.89
0.97
1.06
1.20
1.40
1.87
9.19%
9.59%
10.12%
10.87%
11.98%
14.60%

$5,842
4.44%
4.24%
5.00%
80.00%
400.00%
$49,551
2.94
20.50%

90.00%
900.00%
$55,745
5.88
36.76%

$10,173
$5,842
$4,331
$5,090
($759)
($373)
($387)
$5,842
$5,455

$10,173
$5,842
$4,331
$6,561
($2,230)
($1,094)
($1,135)
$5,842
$4,707

$10,173
$5,842
$4,331
$7,381
($3,050)
($1,497)
($1,553)
$5,842
$4,289

1.14
1.61
0.16

0.85
1.07
0.13

0.66
0.72
0.09

0.59
0.58
0.08

CCC
10.24%
49.08%

CC
11.74%
41.76%

C
13.24%
32.40%

C
13.24%
28.80%

CAPITAL STRUCTURE

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WORKSHEET FOR CALCULATING WEIGHTED AVERAGE COST OF CAPITAL


10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
11.11%
25.00%
42.86%
66.67%
100.00%
150.00%
233.33%
$6,194
$12,388
$18,582
$24,775
$30,969
$37,163
$43,357

D/(D+E)
D/E
$ Debt

0.00%
0.00%
$0

Cost of equity

8.63%

8.88%

9.19%

9.59%

10.12%

10.87%

11.98%

Cost of debt

2.31%

2.31%

2.67%

2.92%

3.43%

4.71%

WACC

8.63%

8.22%

7.89%

7.59%

7.45%

$57,240
$45,598

$60,083
$54,659

$62,651
$65,095

$65,097
$77,927

$66,351
$86,035

Firm Value (C)


Firm Value (G)

80.00%
400.00%
$49,551

90.00%
900.00%
$55,745

14.60%

20.50%

36.76%

5.21%

6.84%

8.95%

9.43%

7.79%

7.92%

9.17%

11.26%

12.16%

$63,452
$68,933

$62,358
$63,772

$53,901
$37,267

$43,871
$20,942

$40,624
$17,340

*Firm Value (C): No growth in savings. New Firm Value=Current Firm value +{(WACC(current)-New WACC)*Current firm value/New WACC}

CAPITAL STRUCTURE
*Firm Value (G): Savings grow. New Firm Value = (EBIT*(1-t)+Depreciation-Capital Spending)/(New WACC-g)
The program uses the following interest coverage ratios and ratings relationships. You can modify them on the input sheet.
The interest rates are automatically updated when the T.Bond rate is entered.
Interest cov
Low
-100000
0.25
0.67
0.87
1.27
1.57
1.87
2.17
2.76
3.29
4.49
5.65
6.85
9.65

Interest cov
High
0.2499999
0.6699999
0.8699999
1.2699999
1.5699999
1.8699999
2.1699999
2.7599999
3.2899999
4.4899999
5.649999
6.849999
9.349999
100000

RATING

Interest rate

D
C
CC
CCC
BB
B+
BB
BBB
AA
A+
AA
AAA

16.24%
13.24%
11.74%
10.24%
9.24%
8.24%
7.24%
6.74%
6.24%
5.74%
5.49%
5.24%
4.94%
4.54%

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