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# PRELIMINARY STUFF AND INPUTS Objective Before you start Inputs Units Income inputs

Balance Sheet

Market Data

Details References Corporate Finance: Theory and Practice, Chapter 18 Applied Corporate Finance: Chapter 8

orporate Finance: Theory and Practice, Chapter 18 plied Corporate Finance: Chapter 8

Question Q1: What do I do excel says there are circular references? Q2: My spreadsheet has gone crazy. I get errors all over. What did I do wrong? Q3: I am entering the inputs for my company but the optimal numbers do not seem to change from the originals Q4: I am getting an optimal debt ratio of 0%. This can't be right. Can it?

Q5: My cost of capital at my optimal debt ratio is higher than the current cost of capital. I thought it was supposed to be lower.

Inputs
Please enter the name of the company you are analyzing: Financial Information Earnings before interest, taxes and depreciation (EBITDA) Depreciation and Amortization: Capital Spending: Interest expense on debt: Tax rate on ordinary income: Current Rating on debt (if available): Interest rate based upon rating: Market Information Number of shares outstanding: Market price per share: Beta of the stock: Book value of debt: Can you estimate the market value of the outstanding debt? 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? Do you have any operating leases? General Market Data Current long-term (LT) government bond rate: Risk premium (for use in the CAPM) General Data Which spread/ratio table would you like to use for your anlaysis? Do you want to assume that existing debt is refinanced at the 'new' rate? Do you want the firm's current rating to be adjusted to the synthetic rating? 1 Yes Yes (Yes or No) (Yes or No) 8.56% 2.80% (in percent) (in percent) Yes 5.00 Yes 379.753 \$307.60 1.23 \$72,960.80 No \$25,426.10 \$6,826.70 \$13,895.50 \$4,947.70 54.01% A9.56% Bharti Airtel

2.8

## Operating Lease Converter

Operating lease expenses are really financial expenses, and should be treated as such. Accounting standards allow th be treated as operating expenses. This program will convert commitments to make operating leases into debt and adjust the operating income accordingly, by adding back the imputed interest expense on this debt.
Inputs Operating lease expense in current year = Operating Lease Commitments (From footnote to financials) Year Commitment ! Year 1 is next year, . 1 \$ 5,204.40 2 \$ 3,457.50 3 \$ 3,457.50 4 \$ 3,457.50 5 \$ 3,457.50 6 and beyond \$ 3,457.50 Pre-tax Cost of Debt = 10.56%

\$456.40

! If you do not have a cost of debt, use the attached ratings estimator

From the current financial statements, enter the following Reported Operating Income (EBIT) = \$18,599.40 ! This is the EBIT reported in the current income statement Reported Interest Expenses = \$4,947.70 Output Number of years embedded in yr 6 estimate = 0 ! I use the average lease expense over the first five years to estimate the number of years of expenses in yr 6 Converting Operating Leases into debt Year Commitment Present Value 1 \$ 5,204.40 \$4,707.31 2 \$ 3,457.50 \$2,828.56 3 \$ 3,457.50 \$2,558.40 4 \$ 3,457.50 \$2,314.04 5 \$ 3,457.50 \$2,093.01 6 and beyond \$ 3,457.50 \$1,893.10 ! Commitment beyond year 6 converted into an annuity for ten years Debt Value of leases = \$ 16,394.42 Restated Financials Operating Income with Operating leases reclassified as debt = Interest expenses with Operating leases classified as debt =

\$ 20,330.65 \$ 6,678.95

nverter

## pense on this debt.

ed ratings estimator

## Inputs for synthetic rating estimation

Enter the type of firm = 1 (Enter 1 if large manufacturing firm, 2 if smaller or riskier firm, 3 if financial service firm) Enter current Earnings before interest and taxes (EBIT) = \$19,055.80 (Add back only long term interest expense fo Enter current interest expenses = \$5,404.10 (Use only long term interest expense for fina Enter current long term government bond rate = 8.56% Output Interest coverage ratio = 3.53 Estimated Bond Rating = AEstimated Default Spread = 2.00% Estimated Cost of Debt = 10.56% For large or stable firms If interest coverage ratio is > to -10000000 0.199999 0.2 0.649999 0.65 0.799999 0.8 1.249999 1.25 1.499999 1.5 1.749999 1.75 1.999999 2 2.499999 2.5 2.999999 3 4.249999 4.25 5.499999 5.5 6.499999 6.5 8.499999 8.50 10000000 For smaller and riskier firms If interest coverage ratio is greater than to -100000 0.499999 0.5 0.799999 0.8 1.249999 1.25 1.499999 1.5 1.999999 2 2.499999 2.5 2.999999 3 3.499999 3.5 4.499999 4.5 5.999999 6 7.499999 7.5 9.499999 9.5 12.499999 12.5 100000 For financial service firms If long term interest coverage ratio is greater than to -100000 0.049999 0.05 0.099999 0.1 0.199999 0.2 0.299999 0.3 0.399999 0.4 0.499999 0.5 0.599999 0.6 0.799999 0.8 0.999999 1 1.49999 1.5 1.99999 2 2.49999 2.5 2.99999 3 100000

## Rating is D C CC CCC BB B+ BB BBB AA A+ AA AAA

Spread is 14.00% 12.70% 11.50% 10.00% 8.00% 6.50% 4.75% 3.50% 2.25% 2.00% 1.80% 1.50% 1.00% 0.75%

## Rating is D C CC CCC BB B+ BB BBB AA A+ AA AAA

Spread is 14.00% 12.70% 11.50% 10.00% 8.00% 6.50% 4.75% 3.50% 2.25% 2.00% 1.80% 1.50% 1.00% 0.75%

or riskier firm, 3 if financial service firm) Add back only long term interest expense for financial firms) Use only long term interest expense for financial firms)

## est coverage ratio is Rating is D C CC CCC BB B+ BB BBB AA A+ AA AAA

Spread Operating is Income Decline 14.00% -50.00% 12.70% -40.00% 11.50% -40.00% 10.00% -40.00% 8.00% -25.00% 6.50% -20.00% 4.75% -20.00% 3.50% -20.00% 2.25% -20.00% 2.00% -17.50% 1.80% -15.00% 1.50% -10.00% 1.00% -5.00% 0.75% 0.00%

CAPITAL STRUCTURE

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Bharti Airtel
Capital Structure Current MV of Equity = Market Value of interest-bearing debt = # of Shares Outstanding = Debt Value of Operating leases (if any) Risk Premium = \$116,812 \$65,188 379.753 \$16,394 2.80% Financial Market Current Beta for Stock = 1.23 Current Bond Rating = ASummary of Inputs Long Term Government Bond8.56% Rate = Pre-tax cost of debt = 9.56% Income Statement Current EBITDA = Current Depreciation = Current Tax Rate = Current Capital Spending= Current Interest Expense = \$27,157 \$6,827 54.01% \$13,896 \$6,679

RESULTS FROM ANALYSIS Current Optimal D/(D+E) Ratio = 41.12% 40.00% Beta for the Stock = Cost of Equity = AT Interest Rate on Debt = 1.23 12.00% 4.86% 1.22 11.97% 5.55% 9.40% \$191,360 \$153,076 \$289.07 \$188.26

Change -1.12% -0.01 -0.04% 0.69% 0.33% (\$7,035) (\$45,319) (\$18.53) (\$119.34) Ratings comparison at current debt ratio Current Interest coverage ratio = 3.04 Rating based upon coverage = AInterest rate based upon coverage = 10.56% Current rating for company = ACurrent interest rate on debt = 9.56%

Implied Growth Rate Calculation Value of Firm = \$198,395 Current WACC = 9.06% Current FCFF = \$2,281.27 ! I am ignoring working capital Implied Growth Rate = 7.83% If this number is >Riskfree rate, I use the riskfree rate as a perpetual growth rate.

## Assumes constant saving Assumes perpeutal growth

WACC 9.06% Implied Growth Rate = 7.83% Firm Value (no growth) = \$198,395 Firm Value (Perpetual Growth) \$198,395 = Value/share (No Growth) = \$307.60 Value/share (Perpetual Growth) \$307.60 =

We use the following default spreads in our analysis. Change them in the input sheet if necessary: Rating Coverage gt and lt Spread AAA 8.5 10000000 0.75% AA 6.5 8.499999 1.00% A+ 5.5 6.499999 1.50% A 4.25 5.499999 1.80% A3 4.249999 2.00% BBB 2.5 2.999999 2.25% BB 2 2.499999 3.50% B+ 1.75 1.999999 4.75% B 1.5 1.749999 6.50% B1.25 1.499999 8.00% CCC 0.8 1.249999 10.00% CC 0.65 0.799999 11.50% C 0.2 0.649999 12.70% D -10000000 0.199999 14.00%

CAPITAL STRUCTURE
Current beta= Current Debt= Tax rate= 1.23 \$81,583 54.01% Current Equity= Current EBITDA= Current Rating= \$116,812 \$27,157 ACurrent Depreciation= Current Interest rate (Company)= Current T.Bond rate= \$6,827 9.56% 8.56%

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D/(D+E) D/E \$ Debt Beta Cost of Equity EBITDA Depreciation EBIT Interest Taxable Income Tax Net Income (+)Deprec'n Funds from Op. Pre-tax Int. cov Funds/Debt Likely Rating Pre-tax cost of debt Eff. Tax Rate D/(D+E) D/E \$ Debt Cost of equity Cost of debt Cost of Capital

0.00% 0.00% \$0 0.93 11.17% \$27,157 \$6,827 \$20,331 \$0 \$20,331 \$10,981 \$9,350 \$6,827 \$16,177 AAA 9.31% 54.01% 0.00% 0.00% \$0 11.17% 4.28% 11.17%

10.00% 11.11% \$19,839 0.98 11.30% \$27,157 \$6,827 \$20,331 \$1,847 \$18,484 \$9,983 \$8,501 \$6,827 \$15,327 11.01 0.77 AAA 9.31% 54.01% 10.00% 11.11% \$19,839 11.30% 4.28% 10.60% \$169,693 \$80,119

WORKSHEET FOR ESTIMATING RATINGS/INTEREST RATES 20.00% 30.00% 40.00% 50.00% 60.00% 25.00% 42.86% 66.67% 100.00% 150.00% \$39,679 \$59,518 \$79,358 \$99,197 \$119,037 1.04 1.11 1.22 1.36 1.63 11.47% 11.68% 11.97% 12.37% 13.13% \$27,157 \$6,827 \$20,331 \$4,111 \$16,220 \$8,760 \$7,460 \$6,827 \$14,286 4.95 0.36 A 10.36% 54.01% 20.00% 25.00% \$39,679 11.47% 4.76% 10.13% \$177,603 \$99,739 \$27,157 \$6,827 \$20,331 \$6,285 \$14,046 \$7,586 \$6,460 \$6,827 \$13,286 \$27,157 \$6,827 \$20,331 \$9,571 \$10,760 \$5,812 \$4,949 \$6,827 \$11,775 \$27,157 \$6,827 \$20,331 \$18,411 \$1,920 \$1,037 \$883 \$6,827 \$7,710 \$27,157 \$6,827 \$20,331 \$22,093 (\$1,763) (\$952) (\$811) \$6,827 \$6,016 0.92 0.05 CCC 18.56% 49.70% 60.00% 150.00% \$119,037 13.13% 9.34% 10.85% \$165,682 \$72,019

70.00% 233.33% \$138,876 2.25 14.85% \$27,157 \$6,827 \$20,331 \$27,859 (\$7,528) (\$4,066) (\$3,462) \$6,827 \$3,365 0.73 0.02 CC 20.06% 39.42% 70.00% 233.33% \$138,876 14.85% 12.15% 12.96% \$138,737 \$36,098

80.00% 400.00% \$158,716 3.44 18.20% \$27,157 \$6,827 \$20,331 \$33,743 (\$13,412) (\$7,244) (\$6,168) \$6,827 \$658 0.60 0.00 C 21.26% 32.54% 80.00% 400.00% \$158,716 18.20% 14.34% 15.11% \$118,995 \$20,866

90.00% 900.00% \$178,555 6.89 27.84% \$27,157 \$6,827 \$20,331 \$37,961 (\$17,630) (\$9,522) (\$8,108) \$6,827 (\$1,281) 0.54 -0.01 C 21.26% 28.93% 90.00% 900.00% \$178,555 27.84% 15.11% 16.38% \$109,771 \$15,466

3.23 2.12 1.10 0.22 0.15 0.08 ABB CCC 10.56% 12.06% 18.56% 54.01% 54.01% 54.01% COST OF CAPITAL CALCULATIONS 30.00% 40.00% 50.00% 42.86% 66.67% 100.00% \$59,518 \$79,358 \$99,197 11.68% 11.97% 12.37% 4.86% 5.55% 8.54% 9.63% 9.40% 10.45% \$186,688 \$131,147 \$191,360 \$153,076 \$172,087 \$85,490

## Value (no growth) \$161,052 Value (perpetual growth) \$63,844

CAPITAL STRUCTURE

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Interest cov Interest cov Low High -10000000 0.199999 0.2 0.649999 0.65 0.799999 0.8 1.249999 1.25 1.499999 1.5 1.749999 1.75 1.999999 2 2.499999 2.5 2.999999 3 4.249999 4.25 5.499999 5.5 6.499999 6.5 8.499999 8.5 10000000

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

Interest rate 22.56% 21.26% 20.06% 18.56% 16.56% 15.06% 13.31% 12.06% 10.81% 10.56% 10.36% 10.06% 9.56% 9.31%

CAPITAL STRUCTURE

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ng working capital

8.00

30.00%

4.00

15.00%

## Beta Cost of Equity

3.00
10.00% 2.00

5.00%
1.00

0.00 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

0.00%

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

Beta 0.93 0.98 1.04 1.11 1.22 1.36 1.63 2.25 3.44 6.89

Cost of Equity Bond Rating Interest rate on debt 11.17% AAA 9.31% 11.30% AAA 9.31% 11.47% A 10.36% 11.68% A10.56% 11.97% BB 12.06% 12.37% CCC 18.56% 13.13% CCC 18.56% 14.85% CC 20.06% 18.20% C 21.26% 27.84% C 21.26%

Tax Rate Cost of Debt (after-tax) 54.01% 4.28% 54.01% 4.28% 54.01% 4.76% 54.01% 4.86% 54.01% 5.55% 54.01% 8.54% 49.70% 9.34% 39.42% 12.15% 32.54% 14.34% 28.93% 15.11%

WACC 11.17% 10.60% 10.13% 9.63% 9.40% 10.45% 10.85% 12.96% 15.11% 16.38%

Firm Value (G) \$63,844 \$80,119 \$99,739 \$131,147 \$153,076 \$85,490 \$72,019 \$36,098 \$20,866 \$15,466