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Crash Course Company Valuation
Crash Course Company Valuation
y Cashflow model
y Multiple model
Capital Structure I
Generally the capital structure consists of:
1. Equity – representing business and asset risk
2. Debt – representing financial risk
Capital Structure II
So:
Corporate tax rate = 30%
Cost of debt = 8.5%
Tax adjusted cost of debt = 0.08 * (1 – 0.3) = 5.6%
Blend Equity and Debt Costs to
calculate WACC
Weighted Average Cost of Capital
Example........
Riskfree Debt Tax rate ERP Equity
rate Premium Beta
Cost of Debt 5.0% 2.0% 30.0% N/A N/A 4.9%
Cost of Equity 5.0% N/A N/A 5% 1.25 11.3%
Test:
Cashflow sensitivities
Cost of capital sensitivities
Terminal value sensitivities (growth rate)
Why test?
Growth 5% Growth 3%
Cost of capital 12% Cost of capital 12%
Near term $ 150 $ 175 $ 190 Near term $ 150 $ 175 $ 190
Terminal $ 2,850 Terminal $ 2,174
$0.50 x 8 = $4:00
Multiple Valuation ‐ Process
Process to calculate:
A helpful relationship:
1 / P|EBIT = (pre tax) ROIC
Operating Multiples
Many industries have unique operating multiples
which can be used comparatively: