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A B C D E

1 THE GORDON MODEL COST OF EQUITY


2 Current share price, P0 60
3 Current dividend, D0 3
4 Anticipated dividend growth rate 12%
5 Gordon model cost of equity, rE Consider a fi
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dividend is D
7 whose share
8 Suppose the
9 grow by 12 p
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F G H I J K
1
2
3
4
5
Consider a firm whose current
6
dividend is Div0 = $3 per share and
7 whose share price is P0 = $50.
8 Suppose the dividend is anticipated to
9 grow by 12 percent per year.
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A B C D

1 JOHNSON & JOHNSON, CASH FLOW TO EQUITY, 1995-2005


Repurchase of
2 Year ending Dividends Stock issues
common stock
3 31-Dec-95 827,000,000 322,000,000 -112,000,000
4 31-Dec-96 974,000,000 412,000,000 -149,000,000
5 31-Dec-97 1,137,000,000 628,000,000 -225,000,000
6 31-Dec-98 1,305,000,000 930,000,000 -269,000,000
7 31-Dec-99 1,479,000,000 840,000,000 -221,000,000
8 31-Dec-00 1,724,000,000 973,000,000 -387,000,000
9 31-Dec-01 2,047,000,000 2,570,000,000 -514,000,000
10 31-Dec-02 2,381,000,000 6,538,000,000 -390,000,000
11 31-Dec-03 2,746,000,000 1,183,000,000 -311,000,000
12 31-Dec-04 3,251,000,000 1,384,000,000 -642,000,000
13 31-Dec-05 3,793,000,000 1,717,000,000 -696,000,000
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15 End 2005 equity data
16 Stock price 61.07
17 Number of shares 3,119,842,000
18 Equity value (P0)
19
20 Equity cash flow, end 2005
21 Future growth rate
22 Based on 10-year growth rate
23 Based on 5-year growth rate
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25 Gordon cost of equity, rE
26 Based on 10-year growth rate
27 Based on 5-year growth rate
E F G H I J K

OW TO EQUITY,
1 1995-2005
Cash flow to Year on year
2
equity (CFTE) growth
1. Find cash flows to equity (CFTE)
3
2. Find growth in cash flows
4
5
3. Find Market value of Equity (also used as P0)
6 4. Find equity cash flow at end of year 2005 (also
7 use as Div0)
8 5. Find 5 and 10 years growth rate
9 6. Estimate Gordon cost of equity based on 5 and
10 10 year's growth rate
11 7. Make a Graph of Div, ROCS, SI, CFTE over time
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L M

2
quity (CFTE)
3
flows
4
of Equity (also
5
used as P0)
w at end of 6year 2005 (also
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growth rate8
ost of equity 9based on 5 and
10
v, ROCS, SI, 11
CFTE over time
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A B C D E

1
HABIB BANK--DIVIDENDS, STOCK ISSUED AND STOCK REPURCHASE
Does historical growth overstate the cost of equity?
Common
2 Common Total Dividend stock Total equity
stock issued payments repurchased cash flow
3 1991 16,462,000 150,730,000 1,215,000 135,483,000
4 1992 29,717,000 170,756,000 31,197,000 172,236,000
5 1993 24,961,000 191,488,000 98,804,000 265,331,000
6 1994 25,339,000 210,503,000 52,908,000 238,072,000
7 1995 24,115,000 235,495,000 65,032,000 276,412,000
8 1996 25,826,000 254,458,000 376,716,000 605,348,000
9 1997 59,281,000 327,303,000 532,682,000 800,704,000
10 1998 80,375,000 381,798,000 531,122,000 832,545,000
11 1999 59,478,000 418,447,000 634,623,000 993,592,000
12
13 Compound growth rate 17.42% 13.61% 118.65% 28.28%
14
Cost of capital using the Gordon Model
15
Using total equity payout and total equity value
16 End 1999 stock price 68.00
Number of shares
17
outstanding, end 1999 202,795,000
18 Future dividend growth, g? 28.28% #VALUE!
19 End 1999 equity value, P0 13,790,060,000 #VALUE!
Projected next total
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equity cash flow, D1 1,274,598,774 #VALUE!
Gordon model cost
21
of equity, rE 37.52% #VALUE!
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23
24
25
26
Shares Total equity
27 outstanding, Dividend per payout
annual average share per share
28 169,841,000 0.89 0.80
29 170,673,000 1.00 1.01
30 172,273,000 1.11 1.54
31 172,339,000 1.22 1.38
32 170,635,000 1.38 1.62
33 167,255,000 1.52 3.62
34 198,290,000 1.65 4.04
35 205,058,000 1.86 4.06
36 202,795,000 2.06 4.90
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A B C D E
38 11.12% 25.47%
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54 1999 1998 1997 1996
55 Common stock issued 59,478,000 80,375,000 59,281,000 25,826,000
56 Dividend payments 418,447,000 381,798,000 327,303,000 254,458,000
57 Common stock repurchased 634,623,000 531,122,000 532,682,000 376,716,000
58 Total equity payout 1,112,548,000 993,295,000 919,266,000 657,000,000
59
Number of shares
60 outstanding
end of year 202,795,000 205,058,000 198,290,000 167,255,000
61
62 Dividends per share 2.06 1.86 1.65 1.52
F G H

ND STOCK1REPURCHASED
e cost of equity?

3 #VALUE!
4 #VALUE!
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13 #VALUE!
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F G H
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54 1994 1993 1992
55 25,339,000 24,961,000 29,717,000
56 210,503,000 191,488,000 170,756,000
57 52,908,000 98,804,000 31,197,000
58 288,750,000 315,253,000 231,670,000
59

60
172,339,000 172,273,000 170,763,000
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62 1.22 1.11 1.00
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54 1991
55 16,462,000
56 150,730,000
57 1,215,000
58 168,407,000
59

60
169,841,000
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62 0.89
A B C D E
1 NESTLE DIVIDENDS, MAY1996 - MAY2006
2 Dividend growth rate, quarterly
3 last 5 years
4 last 10 years
5
6 Dividend growth rate, annualized
7 Last 5 years
8 Last 10 years
9
10 Date Dividends
11 29-May-96 0.195
12 28-Aug-96 0.210 May 1996 to May 2
13 26-Nov-96 0.210 quarters) dividend
14 26-Feb-97 0.210
1. calculate quarte
15 28-May-97 0.210
16 27-Aug-97 0.225
rates for last 5 and
17 25-Nov-97 0.225 2. also calculate an
18 26-Feb-98 0.225 growth rate for last
19 27-May-98 0.225
20 26-Aug-98 0.235
21 24-Nov-98 0.235
22 25-Feb-99 0.235
23 26-May-99 0.235
24 27-Aug-99 0.245
25 26-Nov-99 0.245
26 25-Feb-00 0.245
27 26-May-00 0.245
28 29-Aug-00 0.253
29 28-Nov-00 0.253
30 26-Feb-01 0.253
31 29-May-01 0.253
32 29-Aug-01 0.253
33 28-Nov-01 0.253
34 28-Feb-02 0.253
35 29-May-02 0.253
36 28-Aug-02 0.253
37 26-Nov-02 0.253
38 27-Feb-03 0.253
39 28-May-03 0.253
40 27-Aug-03 0.253
41 25-Nov-03 0.253
42 2-Mar-04 0.253
43 27-May-04 0.253
44 27-Aug-04 0.253
45 23-Nov-04 0.253
46 25-Feb-05 0.253
47 27-May-05 0.253
48 30-Aug-05 0.278
49 29-Nov-05 0.278
A B C D E
50 27-Feb-06 0.278
51 30-May-06 0.278
52
F G H I J
1
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5
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9
10
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May12 1996 to May 2006 quarterly (40
quarters)
13 dividends are given.
14
1. calculate quarterly dividend growth
15
rates
16
for last 5 and 10 years
2. 17
also calculate annualized dividend
growth
18 rate for last 5 and 10 years
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A B C D E

1 COMPUTING JNJ's rE BASED ON DIVIDENDS PER SHARE


2 JNJ's stock price, P0, 31 Dec 2005 61.07
3 Current dividend
4 Quarterly
5 Annualized dividend, Div0
6
7 Dividend growth rate, g Quarterly Annualized 1. F
8 Growth since 17-Nov-00 ann
9 Growth since 14-Nov-03 2. F
10 ann
11 Gordon model cost of equity rE 3. F
12 Growth since 17-Nov-00 calc
13 Growth since 14-Nov-03 17N
14
Dividend per
15
Date share
16 17-Nov-00 0.160
17 15-Feb-01 0.160
18 18-May-01 0.180
19 17-Aug-01 0.180
20 16-Nov-01 0.180
21 14-Feb-02 0.180
22 17-May-02 0.205
23 16-Aug-02 0.205
24 15-Nov-02 0.205
25 13-Feb-03 0.205
26 16-May-03 0.240
27 15-Aug-03 0.240
28 14-Nov-03 0.240
29 12-Feb-04 0.240
30 14-May-04 0.285
31 13-Aug-04 0.285
32 12-Nov-04 0.285
33 11-Feb-05 0.285
34 13-May-05 0.330
35 19-Aug-05 0.330
36 18-Nov-05 0.330
37
F G H I J K L

2
3
4
5
6
7 1. Find the current dividend on quarterly and
8 annualized basis
9 2. Find the dividend growth rate on quarterly and
10 annually basis for 17Nov2000 and 14Nov2003
11 3. Find the cost of equity on the basis of
12 calculated annualized growth rates for
13
17Nov2000 and 14Nov2003
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A B
1 THE GORDON MODEL WITH TWO GROWTH RATES (Supernormal)
2 Current dividend, Div0 8.00
3 Growth rate g1, years 1-5 ("supernormal") 35%
4 Growth rate g2, years 6 - ¥ 8%
5 Number of supernormal growth years 5
6 Cost of equity 18%
7
8 Dividend valuation
9 PV of supernormal growth years
10 Using Excel NPV
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12 PV of normal growth years, after year 5
13 Share value
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Anticipated
15
Year dividend
16 1
17 2
18 3
19 4
20 5
21 6
22 7
23 8
24 9
25 10
26 11
27 12
28 etc.
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C
DEL WITH1TWO GROWTH RATES (Supernormal)
2
3 a firm whose current dividend is $8 per share. The
4 firm’s dividend is expected to grow at 35 percent for
5 the next five years, after which the growth rate will
6
7
slow down to 8 percent per year. The cost of equity,
8 the discount rate for all the dividends, is 18 percent
9
10 1. Find the anticipated dividends
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12 2. Find the PV of supernormal growth years
13 3. Find the PV of normal growth years
14 4. Find the share value
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D
1
2
dividend is3$8 per share. The
ected to grow 4 at 35 percent for
fter which the growth rate will
5

nt per year.67 The cost of equity,


all the dividends,
8 is 18 percent
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d dividends 10
11
rnormal growth years
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mal growth years
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e 14
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A B
1 HABIB BANK, TWO-STAGE GORDON MODEL
2 End-1999 equity value, P0 13,790,060,000
3 End 1999 total equity payout 993,592,000
4
5 High growth rate, ghigh 28.28%
6 Number of high-growth years, m 3
7 Normal growth rate, gnormal 4%
8
Cost of equity, rE
9
using the function TwoStageGordon
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C D E F G H
O-STAGE GORDON
1 MODEL
2
3
4
5
6 Here’s an implementation for Habib Bank
7 assumes three years of
8 gHigh = 28.28 percent, after which the growt
will be gNormal = 4
9 percent. This gives the cost of equity for H
10 Bank of rE = 17.251
11 percent
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I J K L
1
2
3
4
5
mplementation
6 for Habib Bank that
assumes three
7 years of
percent, after
8 which the growth rate
will be gNormal = 4
9
is gives the cost of equity for Habib
Bank of rE10= 17.251
percent
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A B C D E F

1
COMPUTING THE BETA FOR INTEL
monthly returns for Intel and S&P 500, 2001-2006
2 Alpha
3 Beta
4 R-squared
5 t-statistic for alpha
6 t-statistic for beta
7
8 Prices Returns
9 Date Intel SP500 Intel SP500
10 9-Jan-01 35.38 1366.01
11 1-Feb-01 27.32 1239.94
12 1-Mar-01 25.17 1160.33
13 2-Apr-01 29.57 1249.46
14 1-May-01 25.86 1255.82
15 1-Jun-01 28 1224.38
16 2-Jul-01 28.54 1211.23
17 1-Aug-01 26.78 1133.58
18 4-Sep-01 19.58 1040.94
19 1-Oct-01 23.39 1059.78
20 1-Nov-01 31.31 1139.45
21 3-Dec-01 30.15 1148.08
22 2-Jan-02 33.59 1130.2
23 1-Feb-02 27.38 1106.73
24 1-Mar-02 29.17 1147.39
25 1-Apr-02 27.44 1076.92
26 1-May-02 26.51 1067.14
27 3-Jun-02 17.54 989.82
28 1-Jul-02 18.04 911.62
29 1-Aug-02 16.02 916.07
30 3-Sep-02 13.35 815.28
31 1-Oct-02 16.62 885.76
32 1-Nov-02 20.09 936.31
33 2-Dec-02 14.98 879.82
34 2-Jan-03 15.06 855.7
35 3-Feb-03 16.62 841.15
36 3-Mar-03 15.68 848.18
37 1-Apr-03 17.72 916.92
38 1-May-03 20.08 963.59
39 2-Jun-03 20.07 974.5
40 1-Jul-03 24 990.31
41 1-Aug-03 27.59 1008.01
42 2-Sep-03 26.56 995.97
43 1-Oct-03 31.8 1050.71
44 3-Nov-03 32.39 1058.2
45 1-Dec-03 30.95 1111.92
46 2-Jan-04 29.47 1131.13
47 2-Feb-04 28.23 1144.94
48 1-Mar-04 26.3 1126.21
A B C D E F
49 1-Apr-04 24.88 1107.3
50 3-May-04 27.64 1120.68
51 1-Jun-04 26.72 1140.84
52 1-Jul-04 23.61 1101.72
53 2-Aug-04 20.65 1104.24
54 1-Sep-04 19.46 1114.58
55 1-Oct-04 21.59 1130.2
56 1-Nov-04 21.74 1173.82
57 1-Dec-04 22.73 1211.92
58 3-Jan-05 21.81 1181.27
59 1-Feb-05 23.39 1203.6
60 1-Mar-05 22.65 1180.59
61 1-Apr-05 22.93 1156.85
62 2-May-05 26.38 1191.5
63 1-Jun-05 25.46 1191.33
64 1-Jul-05 26.55 1234.18
65 1-Aug-05 25.24 1220.33
66 1-Sep-05 24.19 1228.81
67 3-Oct-05 23.06 1207.01
68 1-Nov-05 26.27 1249.48
69 1-Dec-05 24.57 1248.29
70 3-Jan-06 25.9 1285.45
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G H I J K L M N
NTEL 1
2001-2006
2
3 1. Calculate the monthly returns for Intel and SP500
4 2. Regress Intel returns on SP500 returns to find Alpha,
5 Beta, R-squared, t-stats for alpha and t-stats for beta
6 3. Make a scatter plot as SP500 on x-axis and Intel returns
7 on y-axis
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G H I J K L M N
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O P Q

2
urns for Intel3and SP500
P500 returns4to find Alpha,
lpha and t-stats
5 for beta
00 on x-axis 6and Intel returns
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A B C D E

COMPUTING THE COST OF EQUITY FOR INTEL


1
Classic CAPM: rE = rf + b*[ E(rM)-rf ]
2 Intel beta
3 Risk free rate, rf 4.93%
4 Expected market return, E(rM) 0.00%
5 Intel cost of equity, rE,Intel
If risk
6
7
given
8
9 (No
10
11
12
13
14
15
F G H I J K L

2
3
4
5
If risk free rate and market rate of return are
6
7
given as 4.93% and 9.98% respectively then
8
calculate the rE
9 (Note: use SP slope beta from previous
10 sheet regression output)
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12
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14
15
COMPUTING INTEL'S TAX RATE
INTEL CORP 10-K 2005-12-31: Income Statement
2005/12/31 2004/12/31
Net revenue $38,826,000,000 $34,209,000,000
Cost of sales $15,777,000,000 $14,463,000,000
Gross margin $23,049,000,000 $19,746,000,000
Research and development $5,145,000,000 $4,778,000,000
Marketing, general and administrative $5,688,000,000 $4,659,000,000
Impairment of goodwill $0 $0
Amortization and impairment of acquisition-related $126,000,000 $179,000,000
intangibles and costs
Purchased in-process research and development $0 $0
Operating expenses $10,959,000,000 $9,616,000,000
Operating income $12,090,000,000 $10,130,000,000
Losses on equity securities, net ($45,000,000) ($2,000,000)
Interest and other, net $565,000,000 $289,000,000
Income before taxes $12,610,000,000 $10,417,000,000
Provision for taxes $3,946,000,000 $2,901,000,000
Net income $8,664,000,000 $7,516,000,000
Basic earnings per common share $1,420,000 $1,170,000
Diluted earnings per common share $1,400,000 $1,160,000
Weighted average common shares outstanding $6,106,000,000 $6,400,000,000
Weighted average common shares outstanding, assumi $6,178,000,000 $6,494,000,000
dilution

Tax rate 31.29% 27.85%

This data was extracted by EdgarScan from the PricewaterhouseCoopers Global Technology Centre.
Please read the on-line disclaimer at http://edgarscan.pwcglobal.com/EdgarScan/edgarscan_disclaimer.html
2003/12/31
$30,141,000,000
$13,047,000,000
$17,094,000,000
$4,360,000,000
$4,278,000,000
$617,000,000
$301,000,000

$5,000,000
$9,561,000,000
$7,533,000,000
($283,000,000)
$192,000,000
$7,442,000,000
$1,801,000,000
$5,641,000,000
$860,000
$850,000
$6,527,000,000
$6,621,000,000

24.20%

Technology Centre.
edgarscan_disclaimer.html
A B C

COMPUTING THE COST OF EQUITY FOR INTEL


1
Tax-adjusted CAPM: rE = rf (1-TC) + b*[ E(rM)-rf (1-TC) ]
2 Intel beta
3 Intel tax rate, TC 31.29%
4 Risk free rate, rf 4.93%
5 Expected market return, E(rM) 0.00%
6 Intel cost of equity, rE,Intel
A B C D E F

MEASURING E(rM) USING HISTORICAL DATA


1 Derived from prices for the Vanguard 500 Index Fund (symbol:
VFINX)
These prices include dividends; April 1987 - August 2006
A simple approach to c
2 Average monthly return the historical returns o
3 Monthly standard deviation In the following compu
4 Vanguard’s 500 Index F
5 Annualized return 1. Calculate the month
6 Annualized standard deviation 2. Calculate the averag
7 3. Find the annualized
8 Date Price Return
9 1-Apr-87 17.32
10 1-May-87 17.49
11 1-Jun-87 18.37
12 1-Jul-87 19.28
13 3-Aug-87 20.02
14 1-Sep-87 19.56
15 1-Oct-87 15.31
16 2-Nov-87 14.06
17 1-Dec-87 15.12
18 4-Jan-88 15.75
19 1-Feb-88 16.48
20 1-Mar-88 15.98
21 4-Apr-88 16.14
22 2-May-88 16.27
23 1-Jun-88 17.01
24 1-Jul-88 16.95
25 1-Aug-88 16.37
26 1-Sep-88 17.07
27 3-Oct-88 17.54
28 1-Nov-88 17.28
29 1-Dec-88 17.58
30 3-Jan-89 18.87
31 1-Feb-89 18.40
32 1-Mar-89 18.82
33 3-Apr-89 19.80
34 1-May-89 20.60
35 1-Jun-89 20.47
36 3-Jul-89 22.32
37 1-Aug-89 22.73
38 1-Sep-89 22.64
39 2-Oct-89 22.11
40 1-Nov-89 22.56
41 1-Dec-89 23.10
42 2-Jan-90 21.55
43 1-Feb-90 21.83
44 1-Mar-90 22.40
A B C D E F
45 2-Apr-90 21.84
46 1-May-90 23.95
47 1-Jun-90 23.79
48 2-Jul-90 23.71
49 1-Aug-90 21.57
50 4-Sep-90 20.51
51 1-Oct-90 20.43
52 1-Nov-90 21.74
53 3-Dec-90 22.33
54 2-Jan-91 23.30
55 1-Feb-91 24.96
56 1-Mar-91 25.56
57 1-Apr-91 25.61
58 1-May-91 26.70
59 3-Jun-91 25.49
60 1-Jul-91 26.67
61 1-Aug-91 27.29
62 3-Sep-91 26.83
63 1-Oct-91 27.19
64 1-Nov-91 26.10
65 2-Dec-91 29.07
66 2-Jan-92 28.53
67 3-Feb-92 28.89
68 2-Mar-92 28.33
69 1-Apr-92 29.16
70 1-May-92 29.30
71 1-Jun-92 28.86
72 1-Jul-92 30.03
73 3-Aug-92 29.41
74 1-Sep-92 29.75
75 1-Oct-92 29.85
76 2-Nov-92 30.87
77 1-Dec-92 31.46
78 4-Jan-93 31.49
79 1-Feb-93 31.92
80 1-Mar-93 32.59
81 1-Apr-93 31.80
82 3-May-93 32.64
83 1-Jun-93 32.73
84 1-Jul-93 32.59
85 2-Aug-93 33.82
86 1-Sep-93 33.56
87 1-Oct-93 34.25
88 1-Nov-93 33.91
89 1-Dec-93 34.33
90 3-Jan-94 35.49
91 1-Feb-94 34.52
92 1-Mar-94 33.01
93 4-Apr-94 33.44
A B C D E F
94 2-May-94 33.97
95 1-Jun-94 33.14
96 1-Jul-94 34.23
97 1-Aug-94 35.62
98 1-Sep-94 34.75
99 3-Oct-94 35.53
100 1-Nov-94 34.23
101 1-Dec-94 34.73
102 3-Jan-95 35.63
103 1-Feb-95 37.01
104 1-Mar-95 38.10
105 3-Apr-95 39.22
106 1-May-95 40.78
107 1-Jun-95 41.72
108 3-Jul-95 43.10
109 1-Aug-95 43.21
110 1-Sep-95 45.03
111 2-Oct-95 44.87
112 1-Nov-95 46.83
113 1-Dec-95 47.74
114 2-Jan-96 49.35
115 1-Feb-96 49.81
116 1-Mar-96 50.30
117 1-Apr-96 51.03
118 1-May-96 52.33
119 3-Jun-96 52.53
120 1-Jul-96 50.21
121 1-Aug-96 51.26
122 3-Sep-96 54.13
123 1-Oct-96 55.62
124 1-Nov-96 59.83
125 2-Dec-96 58.65
126 2-Jan-97 62.31
127 3-Feb-97 62.80
128 3-Mar-97 60.20
129 1-Apr-97 63.79
130 1-May-97 67.67
131 2-Jun-97 70.68
132 1-Jul-97 76.31
133 1-Aug-97 72.03
134 2-Sep-97 75.97
135 1-Oct-97 73.43
136 3-Nov-97 76.80
137 1-Dec-97 78.11
138 2-Jan-98 78.98
139 2-Feb-98 84.66
140 2-Mar-98 88.98
141 1-Apr-98 89.88
142 1-May-98 88.31
A B C D E F
143 1-Jun-98 91.91
144 1-Jul-98 90.94
145 3-Aug-98 77.78
146 1-Sep-98 82.76
147 1-Oct-98 89.52
148 2-Nov-98 94.95
149 1-Dec-98 100.47
150 4-Jan-99 104.69
151 1-Feb-99 101.42
152 1-Mar-99 105.47
153 1-Apr-99 109.53
154 3-May-99 106.91
155 1-Jun-99 112.85
156 1-Jul-99 109.32
157 2-Aug-99 108.78
158 1-Sep-99 105.80
159 1-Oct-99 112.49
160 1-Nov-99 114.77
161 1-Dec-99 121.64
162 3-Jan-00 115.52
163 1-Feb-00 113.32
164 1-Mar-00 124.38
165 3-Apr-00 120.64
166 1-May-00 118.18
167 1-Jun-00 121.12
168 3-Jul-00 119.31
169 1-Aug-00 126.70
170 1-Sep-00 120.00
171 2-Oct-00 119.48
172 1-Nov-00 110.07
173 1-Dec-00 110.63
174 2-Jan-01 114.55
175 1-Feb-01 104.09
176 1-Mar-01 97.46
177 2-Apr-01 105.04
178 1-May-01 105.72
179 1-Jun-01 103.13
180 2-Jul-01 102.10
181 1-Aug-01 95.70
182 4-Sep-01 87.95
183 1-Oct-01 89.61
184 1-Nov-01 96.47
185 3-Dec-01 97.32
186 2-Jan-02 95.88
187 1-Feb-02 94.03
188 1-Mar-02 97.55
189 1-Apr-02 91.62
190 1-May-02 90.93
191 3-Jun-02 84.44
A B C D E F
192 1-Jul-02 77.92
193 1-Aug-02 78.43
194 3-Sep-02 69.89
195 1-Oct-02 76.03
196 1-Nov-02 80.71
197 2-Dec-02 75.74
198 2-Jan-03 73.76
199 3-Feb-03 72.64
200 3-Mar-03 73.33
201 1-Apr-03 79.38
202 1-May-03 83.56
203 2-Jun-03 84.61
204 1-Jul-03 86.09
205 1-Aug-03 87.75
206 2-Sep-03 86.81
207 1-Oct-03 91.71
208 3-Nov-03 92.50
209 1-Dec-03 97.33
210 2-Jan-04 99.10
211 2-Feb-04 100.47
212 1-Mar-04 98.95
213 1-Apr-04 97.39
214 3-May-04 98.71
215 1-Jun-04 100.61
216 1-Jul-04 97.28
217 2-Aug-04 97.65
218 1-Sep-04 98.69
219 1-Oct-04 100.19
220 1-Nov-04 104.24
221 1-Dec-04 107.78
222 3-Jan-05 105.14
223 1-Feb-05 107.34
224 1-Mar-05 105.45
225 1-Apr-05 103.43
226 2-May-05 106.71
227 1-Jun-05 106.84
228 1-Jul-05 110.80
229 1-Aug-05 109.79
230 1-Sep-05 110.66
231 3-Oct-05 108.80
232 1-Nov-05 112.90
233 1-Dec-05 112.92
234 3-Jan-06 115.91
235 1-Feb-06 116.21
236 1-Mar-06 117.65
237 3-Apr-06 119.22
238 1-May-06 115.76
239 1-Jun-06 115.91
240 3-Jul-06 116.61
A B C D E F
241 1-Aug-06 119.37
242
G H I J K L M N

A simple approach to computing E(rM) is to take it as the average of


the historical
2 returns of a major market index.
In the following
3 computation we illustrate this approach by using
Vanguard’s
4 500 Index Fund as a proxy for the market.
1. Calculate
5 the monthly returns
2. Calculate the average monthly returns and standard deviations
6
3. Find the
7 annualized returns and standard deviations
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
A B C D E

MEASURING THE MARKET RISK PREMIUM E(rM) - rf USING HISTORICA


1 Vanguard 500 Index Fund (symbol: VFINX) minus Treasury Bills
April 1987 - August 2006
All measurements relate to monthly returns on SP500, r Mt, and the Treasury bill
2 Average monthly risk premium 0.46% #VALUE!
3 Monthly standard deviation 4.34% #VALUE!
4
5 Annualized risk premium 5.50% #VALUE!
6 Annualized standard deviation 15.04% #VALUE!
7
Market
Treasury
8 risk
bill rate
Date Price Return premium
9 1-Apr-87 17.32
10 1-May-87 17.49 0.98% 0.47% 0.51%
11 1-Jun-87 18.37 4.91% 0.47% 4.44%
12 1-Jul-87 19.28 4.83% 0.47% 4.36%
13 3-Aug-87 20.02 3.77% 0.47% 3.29%
14 1-Sep-87 19.56 -2.32% 0.50% -2.83%
15 1-Oct-87 15.31 -24.50% 0.53% -25.03%
16 2-Nov-87 14.06 -8.52% 0.51% -9.03%
17 1-Dec-87 15.12 7.27% 0.47% 6.79%
18 4-Jan-88 15.75 4.08% 0.48% 3.60%
19 1-Feb-88 16.48 4.53% 0.48% 4.05%
20 1-Mar-88 15.98 -3.08% 0.47% -3.55%
21 4-Apr-88 16.14 1.00% 0.48% 0.52%
22 2-May-88 16.27 0.80% 0.49% 0.31%
23 1-Jun-88 17.01 4.45% 0.52% 3.93%
24 1-Jul-88 16.95 -0.35% 0.54% -0.89%
25 1-Aug-88 16.37 -3.48% 0.56% -4.04%
26 1-Sep-88 17.07 4.19% 0.59% 3.60%
27 3-Oct-88 17.54 2.72% 0.60% 2.11%
28 1-Nov-88 17.28 -1.49% 0.61% -2.11%
29 1-Dec-88 17.58 1.72% 0.65% 1.07%
30 3-Jan-89 18.87 7.08% 0.67% 6.41%
31 1-Feb-89 18.4 -2.52% 0.69% -3.21%
32 1-Mar-89 18.82 2.26% 0.71% 1.55%
33 3-Apr-89 19.8 5.08% 0.74% 4.34%
34 1-May-89 20.6 3.96% 0.72% 3.24%
35 1-Jun-89 20.47 -0.63% 0.70% -1.34%
36 3-Jul-89 22.32 8.65% 0.68% 7.97%
37 1-Aug-89 22.73 1.82% 0.66% 1.16%
38 1-Sep-89 22.64 -0.40% 0.66% -1.06%
39 2-Oct-89 22.11 -2.37% 0.65% -3.01%
40 1-Nov-89 22.56 2.01% 0.64% 1.38%
41 1-Dec-89 23.1 2.37% 0.64% 1.72%
42 2-Jan-90 21.55 -6.95% 0.64% -7.58%
A B C D E
43 1-Feb-90 21.83 1.29% 0.64% 0.65%
44 1-Mar-90 22.4 2.58% 0.65% 1.93%
45 2-Apr-90 21.84 -2.53% 0.66% -3.19%
46 1-May-90 23.95 9.22% 0.65% 8.58%
47 1-Jun-90 23.79 -0.67% 0.65% -1.32%
48 2-Jul-90 23.71 -0.34% 0.64% -0.98%
49 1-Aug-90 21.57 -9.46% 0.64% -10.09%
50 4-Sep-90 20.51 -5.04% 0.62% -5.66%
51 1-Oct-90 20.43 -0.39% 0.61% -1.00%
52 1-Nov-90 21.74 6.21% 0.60% 5.62%
53 3-Dec-90 22.33 2.68% 0.59% 2.09%
54 2-Jan-91 23.3 4.25% 0.56% 3.69%
55 1-Feb-91 24.96 6.88% 0.52% 6.36%
56 1-Mar-91 25.56 2.38% 0.50% 1.88%
57 1-Apr-91 25.61 0.20% 0.49% -0.30%
58 1-May-91 26.7 4.17% 0.47% 3.70%
59 3-Jun-91 25.49 -4.64% 0.46% -5.09%
60 1-Jul-91 26.67 4.53% 0.46% 4.06%
61 1-Aug-91 27.29 2.30% 0.47% 1.83%
62 3-Sep-91 26.83 -1.70% 0.44% -2.14%
63 1-Oct-91 27.19 1.33% 0.44% 0.90%
64 1-Nov-91 26.1 -4.09% 0.42% -4.51%
65 2-Dec-91 29.07 10.78% 0.38% 10.40%
66 2-Jan-92 28.53 -1.88% 0.34% -2.21%
67 3-Feb-92 28.89 1.25% 0.32% 0.94%
68 2-Mar-92 28.33 -1.96% 0.32% -2.28%
69 1-Apr-92 29.16 2.89% 0.34% 2.55%
70 1-May-92 29.3 0.48% 0.31% 0.17%
71 1-Jun-92 28.86 -1.51% 0.30% -1.82%
72 1-Jul-92 30.03 3.97% 0.31% 3.67%
73 3-Aug-92 29.41 -2.09% 0.27% -2.35%
74 1-Sep-92 29.75 1.15% 0.26% 0.89%
75 1-Oct-92 29.85 0.34% 0.24% 0.09%
76 2-Nov-92 30.87 3.36% 0.24% 3.12%
77 1-Dec-92 31.46 1.89% 0.26% 1.63%
78 4-Jan-93 31.49 0.10% 0.27% -0.17%
79 1-Feb-93 31.92 1.36% 0.25% 1.11%
80 1-Mar-93 32.59 2.08% 0.24% 1.83%
81 1-Apr-93 31.8 -2.45% 0.25% -2.70%
82 3-May-93 32.64 2.61% 0.24% 2.37%
83 1-Jun-93 32.73 0.28% 0.25% 0.03%
84 1-Jul-93 32.59 -0.43% 0.26% -0.68%
85 2-Aug-93 33.82 3.70% 0.25% 3.45%
86 1-Sep-93 33.56 -0.77% 0.25% -1.02%
87 1-Oct-93 34.25 2.04% 0.25% 1.79%
88 1-Nov-93 33.91 -1.00% 0.25% -1.25%
89 1-Dec-93 34.33 1.23% 0.26% 0.97%
90 3-Jan-94 35.49 3.32% 0.26% 3.07%
91 1-Feb-94 34.52 -2.77% 0.25% -3.02%
A B C D E
92 1-Mar-94 33.01 -4.47% 0.27% -4.74%
93 4-Apr-94 33.44 1.29% 0.29% 1.00%
94 2-May-94 33.97 1.57% 0.31% 1.27%
95 1-Jun-94 33.14 -2.47% 0.35% -2.82%
96 1-Jul-94 34.23 3.24% 0.35% 2.89%
97 1-Aug-94 35.62 3.98% 0.36% 3.62%
98 1-Sep-94 34.75 -2.47% 0.37% -2.85%
99 3-Oct-94 35.53 2.22% 0.39% 1.83%
100 1-Nov-94 34.23 -3.73% 0.41% -4.14%
101 1-Dec-94 34.73 1.45% 0.44% 1.01%
102 3-Jan-95 35.63 2.56% 0.47% 2.09%
103 1-Feb-95 37.01 3.80% 0.48% 3.32%
104 1-Mar-95 38.1 2.90% 0.48% 2.42%
105 3-Apr-95 39.22 2.90% 0.48% 2.42%
106 1-May-95 40.78 3.90% 0.47% 3.43%
107 1-Jun-95 41.72 2.28% 0.47% 1.81%
108 3-Jul-95 43.1 3.25% 0.46% 2.80%
109 1-Aug-95 43.21 0.25% 0.45% -0.20%
110 1-Sep-95 45.03 4.13% 0.45% 3.68%
111 2-Oct-95 44.87 -0.36% 0.44% -0.80%
112 1-Nov-95 46.83 4.28% 0.44% 3.84%
113 1-Dec-95 47.74 1.92% 0.45% 1.48%
114 2-Jan-96 49.35 3.32% 0.43% 2.89%
115 1-Feb-96 49.81 0.93% 0.42% 0.51%
116 1-Mar-96 50.3 0.98% 0.40% 0.58%
117 1-Apr-96 51.03 1.44% 0.41% 1.03%
118 1-May-96 52.33 2.52% 0.41% 2.10%
119 3-Jun-96 52.53 0.38% 0.42% -0.04%
120 1-Jul-96 50.21 -4.52% 0.42% -4.94%
121 1-Aug-96 51.26 2.07% 0.43% 1.64%
122 3-Sep-96 54.13 5.45% 0.42% 5.03%
123 1-Oct-96 55.62 2.72% 0.42% 2.29%
124 1-Nov-96 59.83 7.30% 0.42% 6.88%
125 2-Dec-96 58.65 -1.99% 0.42% -2.41%
126 2-Jan-97 62.31 6.05% 0.41% 5.64%
127 3-Feb-97 62.8 0.78% 0.42% 0.36%
128 3-Mar-97 60.2 -4.23% 0.42% -4.65%
129 1-Apr-97 63.79 5.79% 0.43% 5.36%
130 1-May-97 67.67 5.90% 0.43% 5.47%
131 2-Jun-97 70.68 4.35% 0.42% 3.93%
132 1-Jul-97 76.31 7.66% 0.41% 7.25%
133 1-Aug-97 72.03 -5.77% 0.42% -6.19%
134 2-Sep-97 75.97 5.33% 0.43% 4.90%
135 1-Oct-97 73.43 -3.40% 0.41% -3.81%
136 3-Nov-97 76.8 4.49% 0.41% 4.07%
137 1-Dec-97 78.11 1.69% 0.43% 1.26%
138 2-Jan-98 78.98 1.11% 0.43% 0.68%
139 2-Feb-98 84.66 6.94% 0.42% 6.52%
140 2-Mar-98 88.98 4.98% 0.42% 4.55%
A B C D E
141 1-Apr-98 89.88 1.01% 0.42% 0.59%
142 1-May-98 88.31 -1.76% 0.41% -2.17%
143 1-Jun-98 91.91 4.00% 0.42% 3.58%
144 1-Jul-98 90.94 -1.06% 0.42% -1.48%
145 3-Aug-98 77.78 -15.63% 0.41% -16.04%
146 1-Sep-98 82.76 6.21% 0.41% 5.80%
147 1-Oct-98 89.52 7.85% 0.38% 7.47%
148 2-Nov-98 94.95 5.89% 0.33% 5.56%
149 1-Dec-98 100.47 5.65% 0.37% 5.28%
150 4-Jan-99 104.69 4.11% 0.37% 3.75%
151 1-Feb-99 101.42 -3.17% 0.36% -3.53%
152 1-Mar-99 105.47 3.92% 0.37% 3.55%
153 1-Apr-99 109.53 3.78% 0.37% 3.41%
154 3-May-99 106.91 -2.42% 0.36% -2.78%
155 1-Jun-99 112.85 5.41% 0.38% 5.03%
156 1-Jul-99 109.32 -3.18% 0.38% -3.56%
157 2-Aug-99 108.78 -0.50% 0.38% -0.87%
158 1-Sep-99 105.8 -2.78% 0.39% -3.17%
159 1-Oct-99 112.49 6.13% 0.39% 5.74%
160 1-Nov-99 114.77 2.01% 0.41% 1.60%
161 1-Dec-99 121.64 5.81% 0.42% 5.39%
162 3-Jan-00 115.52 -5.16% 0.43% -5.60%
163 1-Feb-00 113.32 -1.92% 0.44% -2.37%
164 1-Mar-00 124.38 9.31% 0.46% 8.85%
165 3-Apr-00 120.64 -3.05% 0.47% -3.53%
166 1-May-00 118.18 -2.06% 0.47% -2.53%
167 1-Jun-00 121.12 2.46% 0.48% 1.97%
168 3-Jul-00 119.31 -1.51% 0.47% -1.98%
169 1-Aug-00 126.7 6.01% 0.50% 5.51%
170 1-Sep-00 120 -5.43% 0.51% -5.94%
171 2-Oct-00 119.48 -0.43% 0.50% -0.93%
172 1-Nov-00 110.07 -8.20% 0.51% -8.71%
173 1-Dec-00 110.63 0.51% 0.51% -0.01%
174 2-Jan-01 114.55 3.48% 0.48% 3.00%
175 1-Feb-01 104.09 -9.58% 0.43% -10.00%
176 1-Mar-01 97.46 -6.58% 0.41% -6.99%
177 2-Apr-01 105.04 7.49% 0.37% 7.12%
178 1-May-01 105.72 0.65% 0.32% 0.32%
179 1-Jun-01 103.13 -2.48% 0.30% -2.78%
180 2-Jul-01 102.1 -1.00% 0.29% -1.29%
181 1-Aug-01 95.7 -6.47% 0.29% -6.77%
182 4-Sep-01 87.95 -8.44% 0.28% -8.72%
183 1-Oct-01 89.61 1.87% 0.22% 1.65%
184 1-Nov-01 96.47 7.38% 0.18% 7.20%
185 3-Dec-01 97.32 0.88% 0.16% 0.72%
186 2-Jan-02 95.88 -1.49% 0.14% -1.63%
187 1-Feb-02 94.03 -1.95% 0.14% -2.09%
188 1-Mar-02 97.55 3.68% 0.14% 3.53%
189 1-Apr-02 91.62 -6.27% 0.15% -6.42%
A B C D E
190 1-May-02 90.93 -0.76% 0.14% -0.90%
191 3-Jun-02 84.44 -7.40% 0.14% -7.55%
192 1-Jul-02 77.92 -8.04% 0.14% -8.18%
193 1-Aug-02 78.43 0.65% 0.14% 0.51%
194 3-Sep-02 69.89 -11.53% 0.14% -11.66%
195 1-Oct-02 76.03 8.42% 0.14% 8.28%
196 1-Nov-02 80.71 5.97% 0.13% 5.84%
197 2-Dec-02 75.74 -6.36% 0.10% -6.46%
198 2-Jan-03 73.76 -2.65% 0.10% -2.75%
199 3-Feb-03 72.64 -1.53% 0.10% -1.63%
200 3-Mar-03 73.33 0.95% 0.10% 0.85%
201 1-Apr-03 79.38 7.93% 0.09% 7.83%
202 1-May-03 83.56 5.13% 0.09% 5.04%
203 2-Jun-03 84.61 1.25% 0.09% 1.16%
204 1-Jul-03 86.09 1.73% 0.08% 1.66%
205 1-Aug-03 87.75 1.91% 0.08% 1.83%
206 2-Sep-03 86.81 -1.08% 0.08% -1.16%
207 1-Oct-03 91.71 5.49% 0.08% 5.41%
208 3-Nov-03 92.5 0.86% 0.08% 0.78%
209 1-Dec-03 97.33 5.09% 0.08% 5.01%
210 2-Jan-04 99.1 1.80% 0.08% 1.73%
211 2-Feb-04 100.47 1.37% 0.07% 1.30%
212 1-Mar-04 98.95 -1.52% 0.08% -1.60%
213 1-Apr-04 97.39 -1.59% 0.08% -1.67%
214 3-May-04 98.71 1.35% 0.08% 1.27%
215 1-Jun-04 100.61 1.91% 0.09% 1.82%
216 1-Jul-04 97.28 -3.37% 0.11% -3.47%
217 2-Aug-04 97.65 0.38% 0.11% 0.27%
218 1-Sep-04 98.69 1.06% 0.12% 0.94%
219 1-Oct-04 100.19 1.51% 0.14% 1.37%
220 1-Nov-04 104.24 3.96% 0.15% 3.82%
221 1-Dec-04 107.78 3.34% 0.17% 3.17%
222 3-Jan-05 105.14 -2.48% 0.18% -2.66%
223 1-Feb-05 107.34 2.07% 0.19% 1.88%
224 1-Mar-05 105.45 -1.78% 0.21% -1.99%
225 1-Apr-05 103.43 -1.93% 0.23% -2.16%
226 2-May-05 106.71 3.12% 0.23% 2.89%
227 1-Jun-05 106.84 0.12% 0.24% -0.11%
228 1-Jul-05 110.8 3.64% 0.25% 3.39%
229 1-Aug-05 109.79 -0.92% 0.27% -1.18%
230 1-Sep-05 110.66 0.79% 0.29% 0.50%
231 3-Oct-05 108.8 -1.70% 0.29% -1.98%
232 1-Nov-05 112.9 3.70% 0.31% 3.39%
233 1-Dec-05 112.92 0.02% 0.32% -0.31%
234 3-Jan-06 115.91 2.61% 0.32% 2.29%
235 1-Feb-06 116.21 0.26% 0.35% -0.09%
236 1-Mar-06 117.65 1.23% 0.37% 0.86%
237 3-Apr-06 119.22 1.33% 0.38% 0.95%
238 1-May-06 115.76 -2.95% 0.38% -3.33%
A B C D E
239 1-Jun-06 115.91 0.13% 0.39% -0.26%
240 3-Jul-06 116.61 0.60% 0.40% 0.20%
241 1-Aug-06 119.37 2.34% 0.41% 1.93%
F G

PREMIUM E(rM) - rf USING HISTORICAL DATA


d (symbol: VFINX)
1 minus Treasury Bills
1987 - August 2006
returns on SP500, rMt, and the Treasury bill rate rft
2 Methodological note: I have used the St. Louis FRED
3 data for 3-month Treasury Bills; this data is annualized,
4 and I have divided it by 12 to get the monthly returns.
5 Since the data can be taken as an ex-ante return, the
6 April 1987 rate is attributed to May 1987.
7
I've use 3-month instead of 1-month, because there
are lots of data problems with the latter.
8

9
10 #VALUE!
11 #VALUE!
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
A B C

COMPUTING THE COST OF EQUITY FOR INTEL USING THE


1
MARKET RISK PREMIUM E(rM) - rf
2 Intel beta
3 Historical market risk premium 5.50%
4 Intel tax rate, TC 31.29%
5 Risk free rate, rf 4.93%
6 Intel cost of equity, rE,Intel
7 Classic CAPM 4.93% #VALUE!
8 Tax-adjusted CAPM 3.39% #VALUE!
9

Note: The tax-adjusted model in cell B8 uses the equivalence:


10 E(rM) - rf (1-TC) = E(rM) - rf + TC*rf
A B C
1 COMPUTING THE COST OF DEBT FOR KRAFT
2 2005/12/31 2004/12/31
3 Cash and cash equivalents 316,000,000 282,000,000
4
5 Short-term borrowings 805,000,000 1,818,000,000
6 Current portion of long-term debt 1,268,000,000 750,000,000
7 Due to Altria Group, Inc. and affiliates 652,000,000 227,000,000
8 Long-term debt 8,475,000,000 9,723,000,000
9
10 Interest and other debt expense, net 636,000,000 666,000,000
11
12 Net debt 10,884,000,000 12,236,000,000
13 Net interest cost 5.50% 5.44%
14
15 Total debt 11,200,000,000 12,518,000,000
16
17 Interest paid: 679,000,000 633,000,000
18
19 Interest cost 5.73% 5.06%
20
21
22
23
24
25
26
27 Note: Altria debt is priced at LIBOR (from financial statements)
D E F G H I
DEBT FOR1 KRAFT
2
3
4
5 Cost of debt (rD):
6 1. Calculate the net debt and net interest cost
7 2. Find total debt and interest cost
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
J
1
2
3
4
5
erest cost 6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
A B C D
TYSON: COST OF EQUITY rE BASED
1
ON DIVIDENDS
2 Stock price, 11Aug06 13.45
3 Current dividend, D0 0.16
4 Dividend growth rate 0%
5 Gordon cost of equity, rE 1.19% #VALUE!
6
Dividends
7
Date per share
8 29-Aug-01 0.04
9 28-Nov-01 0.04
10 27-Feb-02 0.04
11 29-May-02 0.04
12 28-Aug-02 0.04
13 26-Nov-02 0.04
14 26-Feb-03 0.04
15 28-May-03 0.04
16 27-Aug-03 0.04
17 26-Nov-03 0.04
18 26-Feb-04 0.04
19 27-May-04 0.04
20 30-Aug-04 0.04
21 29-Nov-04 0.04
22 25-Feb-05 0.04
23 30-Aug-05 0.04
24 27-Feb-06 0.04
25 30-May-06 0.04
E F G H I J K L

2
3 Computing the WACC for Tyson Foods
4 1. Find cost of equity based on dividends
5 2. Find cost of equity based on cash flow to equity (Two
6 Stage Gordon Model)
7
3. Find cost of equity using market price/earnings (CAPM
Approach)
8 4. Compute cost of debt for Tyson Foods
9 5. Compute the WACC for Tyson Foods
10
11
12
13
14
15
16
17
18
19
20 Assumption: Tyson hasn’t changed its per-share
21 dividend in five years. so, Div growth rate=0%
22
23
24
25
A B C D
1 TYSON: COST OF EQUITY rE BASED ON CASH FLOW TO EQUITY
2 Shares outstanding 354,820,000
3 Share price, 11Aug06 13.45
4 Equity value, E 4,772,329,000
5 Current (Aug06) total equity payout 81,631,562
6
7 High growth rate, ghigh 10.00% <-- Guess
8 Number of high-growth years 3 <-- Guess
9 Normal growth rate, gnormal 2% <-- Guess
10
Cost of equity, rE, using the function
11
twostagegordon #VALUE!
12
Stock
13 Dividends paid Stock issuance
Date repurchases
14 2001 48,000,000 35,000,000 34,000,000
15 2002 19,000,000 58,000,000 0
16 2003 41,000,000 54,000,000 0
17 2004 72,000,000 55,000,000 43,000,000
18 2005 45,000,000 55,000,000 24,000,000
19 Growth rates
20 Four year 24.06% -1.32% #DIV/0!
21 Two year -20.94% 0.00% -25.29%
22
E F G H I J K
ON CASH1FLOW TO EQUITY
2
3
4
5
6 In cell B5 we assume that the August 2006 equity payout is the pa
7
for the financial year ending October 2005 multiplied by the high g
rate to the power 0.75.
8 Two Stage Gordon Model incorporates a guesstimate
9 of 10 percent for a high growth rate of equity payouts over the nex
10 years, followed by a normal growth rate of 2 percent.

11

12
Cash flow to
13
equity holders
14 49,000,000
15 77,000,000
16 95,000,000
17 84,000,000
18 76,000,000
19
20 -0.33%
21 -4.88%
22
L M N
1
2
3
4
5
August 2006 equity
6 payout is the payout
tober 2005 multiplied
7
by the high growth
the power 0.75.
odel incorporates8 a guesstimate
rate of equity payouts
9 over the next three
ormal growth rate
10 of 2 percent.

11

12
13
14
15
16
17
18
19
20
21
22
A B
COMPUTING THE COST OF EQUITY rE FOR TYSON USING THE MARKET
1
PRICE/EARNINGS MULTIPLE TO COMPUTE E(rM)
2 Market price/earnings multiple, August 2006 17
3 Equity cash flow payout ratio 50.00%
4 Anticipated growth of equity cash flow 6.00%
5 Expected market return, E(rM) 9.118%
6
7 Tyson cost of equity calculations
8 Tyson beta 0.20
9 Tyson tax rate, TC 29.55%
10 Risk free rate, rf 4.93%
11 Tyson cost of equity, rE,Kraft
12 Classic CAPM 5.77%
13 Tax-adjusted CAPM 4.60%
14
15 Note: Price/Earnings ratio for S&P 500 from http://www.bullandbearwise.com
C D E F
Y rE FOR TYSON USING THE MARKET
1
TIPLE TO COMPUTE E(rM)
2
3
4
5
6
7
8 <-- From Yahoo
9 <-- Computed from Tyson financials erm=
10
11
12
13
14
15
llandbearwise.com
G H I J K

2
3
4
5
6
7
8
9 equitycashflow payout ratiio*(1+anticepaed cashflow)/
10
11
12
13
14
15
A B C D
1 COMPUTING THE COST OF DEBT FOR TYSON
2 2005 2004
3 Cash and cash equivalents 40,000,000 33,000,000
4 Current debt 126,000,000 338,000,000
5 Long term debt 2,869,000,000 3,024,000,000
6 2,995,000,000 3,362,000,000
7 Net debt 2,955,000,000 3,329,000,000
8 Interest paid 227,000,000
9
10 Interest cost 7.22%
11
A B
1 COMPUTING THE WACC FOR TYSON
2 Shares outstanding 354,820,000
3 Share price, end 2005 13.45
4 Equity value, E 4,772,329,000
5 Net debt, D 2,955,000,000
6 Tax rate, TC 29.55%
7 WACC based on Gordon per-share dividends and interest from financial statements
8 Cost of equity, rE #VALUE!
9 Cost of debt, rD 7.22%
10 Tax rate, TC 29.55%
11 WACC #VALUE!
12
13 WACC based on Gordon equity payouts and interest from financial statements
14 Cost of equity, rE #VALUE!
15 Cost of debt, rD 7.22%
16 Tax rate, TC 29.55%
17 WACC #VALUE!
18
19 WACC based on classic CAPM and interest from financial statements
20 Cost of equity, rE 5.77%
21 Cost of debt, rD 7.22%
22 Tax rate, TC 29.55%
23 WACC 5.51%
24
25 WACC based on tax-adjusted CAPM and interest from financial statements
26 Cost of equity, rE 4.60%
27 Cost of debt, rD 7.22%
28 Tax rate, TC 29.55%
29 WACC 5.60%
30
31 Estimated WACC? #VALUE!
32
C D E F
COMPUTING
1 THE WACC FOR TYSON
2
3
4 waac= market value of equity /eq
5
6 w1 equity value/equity value+
share dividends
7 and interest from financial statements
8 w2= net debt/market value of e
9
10
11
12
ty payouts and
13interest from financial statements
14
15
16
17
18
M and interest19
from financial statements
20
21
22
23
24
CAPM and interest
25 from financial statements
26
27
28
29
30
31
32
G H I J
1
2
3
market 4value of equity /equityvalue+net debt
5
6
equity value/equity value+net debt
7
8
net debt/market value of equity +net debt
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
A B C D

1
CASCADE: COST OF EQUITY rE BASED ON DIVIDENDS
Dividend growth rate computed on daily basis
2 Share price, 31jan06 50.69
3 Current dividend, D0
4 Gordon cost of equity, rE
5 Using growth since 16-Feb-99
6 Using growth since 02-Jan-04
7 Using growth since 29-Dec-04
8
Dividends Days between
9
Date per share dividend payments
10 16-Feb-99 0.10
11 18-May-99 0.10 91 #VALUE!
12 17-Aug-99 0.10 91 #VALUE!
13 1-Dec-99 0.10 106
14 22-Feb-00 0.10 83
15 16-May-00 0.10 84
16 24-Aug-00 0.10 100
17 29-Nov-02 0.10 827
18 26-Mar-03 0.10 117
19 25-Jun-03 0.10 91
20 18-Sep-03 0.10 85
21 2-Jan-04 0.11 106
22 29-Mar-04 0.11 87
23 23-Jun-04 0.11 86
24 20-Sep-04 0.11 89
25 29-Dec-04 0.12 100
26 28-Mar-05 0.12 89
27 1-Jul-05 0.12 95
28 4-Oct-05 0.15 95
29 3-Jan-06 0.15 91
30
31 Computing the growth rate of dividends
32 Daily growth, 16-Feb-99 - 03-Jan-06 0.0161%
33 Annualized 6.07%
34
35 Daily growth, 02-Jan-04 - 03-Jan-06 0.0424%
36 Annualized 16.73%
37
38 Daily growth, 29-Dec-04 - 03-Jan-06 0.060%
39 Annualized 24.62%
A B C D
1 CASCADE: COST OF EQUITY rE BASED ON CASH FLOW TO EQUITY
2 Shares outstanding 12,536,000
3 Share price, 31jan06 50.69
4 Equity value, E 635,449,840
5 2005 total equity payout 3,904,000
6 Growth rate of payouts 9.78%
7 Cost of equity, rE 10.46%
8
9
Stock
10 Dividends paid Stock issuance
Date repurchases
11 1/31/2001 0 2,448,000
12 1/31/2002 1,354,000 0
13 1/31/2003 1,396,000 1,200,000 73,000
14 1/31/2004 0 4,936,000 1,299,000
15 1/31/2005 5,478,000 1,616,000
16 1/31/2006 6,691,000 2,787,000
17 Growth rate
E F
ED ON CASH
1 FLOW TO EQUITY
2
3
4
5
6
7
8
9
Cash flow to
10
equity holders
11 2,448,000
12 1,354,000
13 2,523,000
14 3,637,000
15 3,862,000
16 3,904,000
17 9.78%
A B

COMPUTING THE COST OF EQUITY rE FOR CASCADE USING THE


1
MARKET PRICE/EARNINGS MULTIPLE TO COMPUTE E(rM)
2 Market price/earnings multiple, December 2005 18
3 Equity cash flow payout ratio 50.00%
4 Anticipated growth of equity cash flow 6.00%
5 Expected market return, E(rM)
6
7 Cascade cost of equity calculations
8 Cascade beta 1.65
9 Cascade tax rate, TC
10 Risk free rate, rf 4.93%
11 Cascade cost of equity, rE,Cascade
12 Classic CAPM
13 Tax-adjusted CAPM
14
15 Note: Price/Earnings ratio for S&P 500 from http://www.bullandbearwise.com
C

EQUITY rE FOR CASCADE USING THE


1
NGS MULTIPLE TO COMPUTE E(rM)
2
3
4
5
6
7
8 <-- From Yahoo
9 <-- Computed from Cascade financials
10
11
12
13
14
15
http://www.bullandbearwise.com
A B C
1 COMPUTING THE COST OF DEBT rD FOR CASCADE
2 2006/01/31 2005/01/31
3 Cash and cash equivalents
4 Marketable securities
5
6
7 Notes payable to banks 4,741,000 2,461,000
8 Current portion of long-term debt 12,681,000 12,916,000
9 Long-term debt, net of current portion 12,500,000 25,187,000
10 Total debt 29,922,000 40,564,000
11
12 Interest expense
13 Interest income
14
15 Interest cost
16 Interest income
17
18 Debt net of cash 29,922,000 40,564,000
19 Debt net of cash and marketable securities 29,922,000 40,564,000
D
BT rD FOR1CASCADE
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18 #VALUE!
19
A B

1
COMPUTING THE WACC FOR CASCADE
The company has negative leverage
2 Shares outstanding 12,536,000
3 Share price, end 2005 50.69
4 Equity value, E 635,449,840
5 Net debt, D
6
7 WACC based on Gordon per-share dividends and interest from financial statements
8 Cost of equity, rE
9 Cost of debt, rD
10 Tax rate, TC
11 WACC
12
13 WACC based on Gordon equity payouts and interest from financial statements
14 Cost of equity, rE
15 Cost of debt, rD
16 Tax rate, TC
17 WACC
18
19 WACC based on classic CAPM and interest from financial statements
20 Cost of equity, rE
21 Cost of debt, rD
22 Tax rate, TC
23 WACC
24
25 WACC based on tax-adjusted CAPM and interest from financial statements
26 Cost of equity, rE
27 Cost of debt, rD
28 Tax rate, TC
29 WACC
30
31 Estimated WACC?
C
OMPUTING1 THE WACC FOR CASCADE
The company has negative leverage
2
3
4
5
6
share dividends
7 and interest from financial statements
8
9
10
11
12
ty payouts and
13interest from financial statements
14
15
16
17
18
M and interest19
from financial statements
20
21
22
23
24
CAPM and interest
25 from financial statements
26
27
28
29
30
31