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American Home Products

Free cash flows, WACC, and implicit growth

FREE CASH FLOWS


EBIT
EBIT (1-t)
+ Amortization/Depreciation
- Investments
Free cash flows

Tax rate
Times interest earned (interest coverage
ratio)
Leveraged Beta
Unleveraged Beta
Risk free rate
Market Risk Premium
Market value of Equity
Market value of Debt
Market value of the Company
Rating of debt
Cost of debt before taxes
Cost of debt after taxes
Cost of equity (current)
E/D+E
WACC (current)
Rate of growth (gFC)

954.80
496
0
0
496

48%
415.13
0.8
0.798
14.0%
7.0%

EBIT/Interest
Data

$4,665
$14
$4,679
AAA
14.20%
7.38%
19.60%
99.70%
19.56%
8.09%

Capitalization
Data
Add
Rating
Rating

Data
Data

EV = FCF x (1+g) / (ka - g)

Value of the Company


$4,671
D/D+E
0%
D/E
0.00%
$Debt
$0
EBIT
$955
Interest
$0
EBT
$955
Tax
$458
Net Income
$496
Interest coverage ratio #DIV/0!
Debt rating
AAA
RFR
14.0%
Bond Premium
0.20%
Interest rate
14.2%
Effective tax rate
48%
Cost of debt after tax
7.38%
$5,570
45%
81.82%
$2,506
$955
$476
$479
$230
$249
2.01
B
14.0%
5.00%
19.0%
48%
9.88%

$5,502
50%
100.00%
$2,751
$955
$557
$398
$191
$207
1.71
B14.0%
6.25%
20.3%
48%
10.53%

$5,601
55%
122.22%
$3,081
$955
$624
$331
$159
$172
1.53
B14.0%
6.25%
20.3%
48%
10.53%

$4,809
5%
5.26%
$240
$955
$34
$921
$442
$479
27.96
AAA
14.0%
0.20%
14.2%
48%
7.38%

$4,956
10%
11.11%
$496
$955
$70
$884
$425
$460
13.57
AAA
14.0%
0.20%
14.2%
48%
7.38%

$5,705
60%
150.00%
$3,423
$955
$693
$262
$126
$136
1.38
B14.0%
6.25%
20.3%
48%
10.53%

$5,086
15%
17.65%
$763
$955
$114
$841
$404
$437
8.40
A+
14.0%
0.90%
14.9%
48%
7.75%

$5,812
65%
185.71%
$3,778
$955
$765
$190
$91
$99
1.25
B14.0%
6.25%
20.3%
48%
10.53%

$5,225
20%
25.00%
$1,045
$955
$159
$796
$382
$414
6.01
A
14.0%
1.20%
15.2%
48%
7.90%
$5,534
70%
233.33%
$3,874
$955
$852
$103
$49
$53
1.12
CCC
14.0%
8.00%
22.0%
48%
11.44%

$5,364
25%
33.33%
$1,341
$955
$208
$747
$359
$388
4.59
A14.0%
1.50%
15.5%
48%
8.06%
$5,608
75%
300.00%
$4,206
$955
$925
$29
$14
$15
1.03
CCC
14.0%
8.00%
22.0%
48%
11.44%

$5,484
30%
42.86%
$1,645
$955
$263
$692
$332
$360
3.63
BBB
14.0%
2.00%
16.0%
48%
8.32%
$5,114
80%
400.00%
$4,091
$955
$961
-$7
-$3
-$3
0.99
CC
14.0%
9.50%
23.5%
46%
12.76%

$5,440
35%
53.85%
$1,904
$955
$343
$612
$294
$318
2.79
B+
14.0%
4.00%
18.0%
48%
9.36%
$4,859
85%
566.67%
$4,130
$955
$971
-$16
-$8
-$8
0.98
CC
14.0%
9.50%
23.5%
43%
13.48%

$5,453
40%
66.67%
$2,181
$955
$414
$540
$259
$281
2.30
B
14.0%
5.00%
19.0%
48%
9.88%
$4,628
90%
900.00%
$4,165.05
$955
$979
-$24
-$12
-$12
0.98
CC
14.0%
9.50%
23.5%
40%
14.12%

Estimate the Cost of Equity

American Home Products


WACC and value of the company by levels of debt

D/D+E
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%

D/E
0%
5%
11%
18%
25%
33%
43%
54%
67%
82%
100%
122%
150%
186%
233%
300%
400%
567%
900%

Beta
0.80
0.84
0.89
0.94
1.00
1.06
1.14
1.23
1.33
1.45
1.60
1.77
1.99
2.28
2.66
3.19
3.99
5.32
7.98

re
19.58%
19.88%
20.20%
20.57%
20.98%
21.44%
21.98%
22.59%
23.31%
24.15%
25.17%
26.41%
27.96%
29.95%
32.61%
36.33%
41.92%
51.22%
69.83%

D/(D+E)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%

D/E
0%
5%
11%
18%
25%
33%
43%
54%
67%
82%
100%
122%
150%
186%
233%
300%
400%
567%
900%

re
19.58%
19.88%
20.20%
20.57%
20.98%
21.44%
21.98%
22.59%
23.31%
24.15%
25.17%
26.41%
27.96%
29.95%
32.61%
36.33%
41.92%
51.22%
69.83%

rd
7.38%
7.38%
7.38%
7.75%
7.90%
8.06%
8.32%
9.36%
9.88%
9.88%
10.53%
10.53%
10.53%
10.53%
11.44%
11.44%
12.76%
13.48%
14.12%

WACC(ra)
19.58%
19.25%
18.92%
18.65%
18.36%
18.10%
17.88%
17.96%
17.94%
17.73%
17.85%
17.67%
17.50%
17.33%
17.79%
17.66%
18.59%
19.14%
19.69%

With growth
Level of D/D+E
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%

D/E
0%
5%
11%
18%
25%
33%
43%
54%
67%
82%
100%
122%
150%
186%
233%
300%
400%
567%
900%

WACC(Ra)
19.58%
19.25%
18.92%
18.65%
18.36%
18.10%
17.88%
17.96%
17.94%
17.73%
17.85%
17.67%
17.50%
17.33%
17.79%
17.66%
18.59%
19.14%
19.69%

$5,900

20.00%

$5,700

19.50%

$5,500

Value of the
company
$4,671
$4,809
$4,956
$5,086
$5,225
$5,364
$5,484
$5,440
$5,453
$5,570
$5,502
$5,601
$5,705
$5,812
$5,534
$5,608
$5,114
$4,859
$4,628

FCF
496
496
496
496
496
496
496
496
496
496
496
496
496
496
$496
$496
496
496
496

19.00%

$5,300
18.50%
$5,100

18.00%

$4,900

17.50%

$4,700

17.00%

$4,500
0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

American Home Products


Optimal structure as per the cost of capital model

D/D+E
Leveraged Beta
Cost of Equity (Re)
Interest rate (after tax)
WACC
Rate of growth (g)
Market value of Equity
Market value of Debt
Market value of the Company
Number of shares (millions)
Shares bought back (millions)
Price per share

Current
0.3%
0.80
19.60%
7.38%
19.56%
8.09%
$4,665
$14
$4,679
155.50
0.0
$30.00

Optimal
65%
2.28
29.95%
10.53%
17.33%
8.09%
$2,034
$3,778
$5,812
46.79
108.71
$37.29