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CAPM with Negtive Beta
Hi everyone! I've found some discussions around negative cost of equity for companies with negative beta and so with cost of debt > cost of equity, but it seems unrealistic and there haven't been any real answers. So how would you calculate Cost of Equity for a company with a negative Beta? Thank...
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Dynamic WACC
How would you model a dynamic WACC?
YTM as a proxy for cost of debt?
Hi @all, I'm rather new to the world of corporate finance. Currently, I'm studying the cost of capital and during this process, a question regarding the cost of debt came up. Assume the possible situation: Last year, a company X issued a bond maturing in 2050. Even somewhat unrealistic, we know that...
Public Finance Discount Rates
Hi all, I am currently trying to create a DCF model valuing an asset purchase by a US municipal utility with limited information available, and am struggling with the WACC/discount rate in particular. The best I can think of is the DOE has guidelines using a 3% discount rate but I'm not sure that...
Venture Capital / WACC
Thoughts on using a staggered discount rate in a DCF to value a growth company? For e.g. over a 10 year horizon using 15% for the last 5 years and 25% for the first 5 - the idea is that the company is significantly derisked in the first 5 years
Do you keep the discount rate constant in a DCF or decrease over the explicit forecast period?
Dear all, Should I decrease the WACC for a target in the explicit forecast period to reflect maturity or keep it constant? A decrease may be difficult to substantiate, whereas a constant discount factor would be overly simplistic? By constant I mean, ie 10% over 10 years with the change only...
WACC and COMPS
Why re-lever beta based on the median percentage debt (as percentage of capital structure) of comps? 2. Why calculate WACC weights based on median capital structure of comps? 3. Why should the cap str of comps move you to the implied value? Isn't this relevant mostly for companies that are not...
Cost of capital: size premium, liquidity premium, etc.
I have always wondered how did we come up with these many premiums to add to our cost of capital calculation e.g. size premium, liquidity premium. Like how we do know if a certain risk factor has already been factored into the cost of capital calculation (presumably beta of the cost of capital). It...
WACC in Emerging Markets
Hello everyone, I recently talked with a girl who, during her summer analyst interview, got asked this question: "How does WACC change if you value a company in an emerging market?" . How would you people answer this? Thanks a lot!
WACC: How do you calculate your cost of debt?
LTM Cash interest paid as a percent of debt? Interest expense that is inclusive of amort. of OID/DIC as a percentage of debt? Market rate of TLs/bonds? Do you include mandatory debt repayments (such as 1% per annum on TLBs)? What about if you have a floating rate that is dependent on LIBOR? There...
Market value of debt in WACC
Hello, how we can estimate market value of debt if we dont know any detail about loans of copmany (YTD and others) just book value of debt and cost all of the interest togheter in income statement. All list issued of bonds is availble in the internet but arout 72 bil is from bonds debt and 20 bil...
Does a company ever want a higher WACC?
Trying to decipher this sentence that came from a request on how we are reporting WACC; "a higher WACC is better as many times it is used as a benchmark for capital projects", which started from a discussion in waterfalling trending WACC movements and that basically the upward movement of WACC...
WACC - Risk Free
What would you guys use right now as a risk free rate? The 10 year bond yield seems to be insanely low, would you use this sub 1% rate? Or go with a past one like 3%. My intuition is you have to go with the very low
wacc calculation - what should I use for market value of equity for a private company
My first post here at WSO forum. Hopefully I can get some answers! My question is: For wacc calculation, apparently we assume book value of debt roughly equivalent to market value of debt. What about market value of equity assuming it's a private company? What do you do? Am I suppose to take the...
EY TAS Val vs Alvarez & Marsal Val
If you had to choose between the following two offers which one would you choose and why? Alvarez & Marsal Valuation Services - Sr. Assoc. - 20-25% year end bonus based off hours billed. EY TAS - Valuation & Business Modeling - Senior - 10% year end bonus, however EY is offering 10k more on the base...
Choosing weighted average cost of capital (wacc)
Hi A company has two projects - A and B - which it wants to finance entirely with debt. If the company proceeds with project A it can get a special govt-subsidized loan for 5%. If it goes with project B it will need to borrow from the bank at 8%. Both projects have similar cash flows (before...
wacc breakdown (net debt usage/ average debt)
Dear users, Please help me to understand wacc calculation. I do my master programme and teacher of Corporate Finance course requires us to calculate wacc using average net debt. Could you help me understand the logic? I have checked: -berk, demarzo -damodaran -brealey myers And i haven't manage to...
WACC Analysis Questions
Hey all, Two quick questions. I am running a DCF and am looking to fine tune some of the assumptions in the WACC analysis. Specifically, what are the best assumptions to use for "Size Premiums" and the "Market Risk Premium"? Any assistance here would be appreciated
WACC real rate calculation
Hello Everybody! Could you please help me with a discounting rate issue? I'm working on an investment project with 60% leverage. Let's say nominal cost of equity 15% (Russian rubles), and cost of debt (jpy) is about 3.5%. Tax shield 20%. Then my WACC will be calculated as 15% x 0,4 + 3.5% x 0,6 x (1...
T Mobile + Sprint Cost Synergies - $6bn synergies, $43bn NPV, 8% WACC
J. Braxton Carter T-Mobile US, Inc. - Executive VP & CFO: "Hey, the first thing, we talked about run-rate synergies of $6-plus billion. I want to emphasize that’s pretax. We’ve talked about cost to achieve of $15 billion and gave you more details on this call. That’s pretax. And we’ve talked...
Company or investor WACC?
I was confronted with this issue a week ago - investor or company WACC? When estimating the value of a listed company, say Facebook. Do you use Facebook's WACC or the WACC of a highly diversified investor, say a mutual fund? Might be a weird question.
WACC for different industries
I was wondering if anyone could help explain how WACC might be different for industries? I understand that debt is cheaper than equity, and that start-ups would have less debt than mature companies, but what about between industries? Specifically, I am looking for how WACC differs between real...
Comprehensive Guide to Beta in the CAPM and Cost of Capital
I've been wanting to do a post like this for a while given the amount of confusion regarding terminology and the various formulas during IB interview prep. All from Berk&DeMarzo's Corporate Finance and an MBA Corporate Finance class. Note that this is academic and probably overkill, but I hope it's...
Effect of Debt on stock prices
Hi everyone, what is the effect of leverage on stock prices, should you expect better performance from a company with high leverage that is not going to suffer from cyclicality/downturn? My understanding is that higher leverage boosts ROE so you should expect better performance from that part. Also,...
Valuation Guidance related to WACC / CoE
I was doing valuation of a company in emerging markets and I have a question in mind but couldn't find a proper theory suggesting a solution. Suppose, the company receives its revenue in US$ currency and incur costs in INR currency. The company's functional currency is INR so the revenues are...
Minority Interest in Capital Structure
Hello everyone, this may seem like a stupid question but when creating a basic DCF model, how should i factor Minority interest into WACC? Specifically in the case of a costco DCF I'm working on. I'll save all of the details but debt is 36.3%, equity is 62.1%, and MI is 1.6%. For all intents and...
DCF result - Equity value from EV
Hi all What is the correct way to arrive at equity value after the EV was calculated (via DCF )? Suppose we have to value equity of a PRIVATE company. We identified target cap. structure, performed DCF and got the EV . What to do next? 1. subtract debt which is taken from the BS (assumption that...
What causes WACC to invert?
Hi together, I'm currently working on a valuation and cannot figure out my mistake (if it is one). I calculate WACC by using the basic formula: WACC = (E/V) * Cost of Equity + (1-(E/V)) * (1-t) * Cost of Debt Since the company is private I calculate the Cost of Equity using the CAPM and a relevered...
Using Market Cap in D/E weights for WACC and Beta Calculations
Why does the Street use E = market value of the firm's equity (Market Cap) for the D/E weights in the calculation of WACC and beta (unlevering and relevering), not book value of equity? I understand that for debt, we simply use what's recorded in book since we assume market value and book value of...
How to calculate size/company specific risk premium
Hi guys, I'm currently trying to build out a DCF , and am stuck on the WACC . How do you estimate a company's size premium or company specific risk premium? I know valuation is as much art as science, but can someone at least point me in the direction of working this out please? I've tried multiple...
Project analysis: using WACC and cost and price escalation indexes
While analyzing an investment project, do you think it is correct to use WACC as a discount rate while also using cost and price escalation indexes on a yearly basis?
How do you estimate a market value of debt? (UK companies)
I've trying to follow Damodaran's instructions on estimating a market value of debt: *"The market value of debt is usually more difficult to obtain directly, since very few firms have all their debt in the form of bonds outstanding trading in the market. Many firms have non-traded debt, such as bank...
Activision Blizzard Capital Structure. WACC or APV
Good morning, I am at the moment trying to value Activision Blizzard. I did some research with regards to which method I should use to value the company, either WACC ( DCF ) or APV. In my studies, I found that WACC should be used if the firm keeps a relatively constant capital structure or if the...
WACC and Unlevered Beta
Hey guys, one issue with CAPM , WACC and Beta just doesn't seem right to me. Maybe somebody wouldn't mind helping me to figure it out. The usual formulas are Bu=Bl/(1+(1-t)D/E), Re= Rf + BlERP, WACC= (1-t)RdD/(D+E) + Re*E/(D+E), aren't we double counting tax shields if we use them together?
Calculating IRR of cash flows with terminal value
I have a project with an initial outlay (Year 0) and 10 years of forecasted positive FCFFs and FCFEs. After 10 years, I use a Gordon/Perpetuity Growth Model to determine Terminal Value. I built DCF model and discounted FCFFs with WACC (to arrive at Enterprise Value) and FCFEs with Cost of Equity (to...
Formulas? Any insight is appreciated.
Hi Everyone, My friend currently works in PWM at a major firm as an Associate. He is basically an assistant but has learned a LOT about the industry. He has a second round interview with a global fund manager that services only institutional clients. Essentially he is making the switch from the...
What does WACC represent conceptually? Why do we use it?
I understand, at least on a superficial/calculation level, how to discount cash flows/calculate NPV. But, I am not sure I have a deep enough understanding of the concept behind it. Let me use a simple example of a bond. There are two bonds, one earns 5% and the other 6%, both with par of $1000....
DCF for Private company (WACC)
I have a question about valuation hoping anyone could help. I have a private high-tech company with positive income for 3 years. I would like to use industry average D/V, E/V ratio to calculate WACC and Beta for the cost of equity. However, this company has about 40% preferred stock. The WACC=...
Real Estate WACC Valuation
I am working on a feasibility financial model for a commercial complex. For this purpose I am calculating NPV of the project. The project will be financed by 50% debt 50% equity, however the debt is a fully amortising loan with equal payments over 10 years. The company will have no debt after 10...
Valuation doubts
Hey guys, I looked around a lot for answers, but I'm still struggling to understand the answer to two important valuation related topics that I'm currently going through for my interview preparation. So, thought of posting it here. 1. Calculation of FCFF - the two accepted formulas seem to use EBIT...
Beta for Illiquid assets
Hi all! Today during class we were looking at the valuation of real estate and for the example given, the WACC was provided. I was just thinking that for the calculation of WACC , how do you estimate the beta? My understanding of beta estimation is that you will require a list of returns for both...
Hmm, is this WACC low?
Hi Guys, I`ve got a firm with a low beta (.5) and a low gearing of 25%, eventually yielding a 4% WACC . (7.61% Rm) It feels a wee bit too low, doesn`t it ?
cost of capital of state-owned enterprises
1. The questions below are for partially state-owned enterprises that are publicly listed a) Can the government fund its debt indefinitely? if so what would be the impact on the cost of capital? do we use only CAPM or WACC ? b) Which cashflow method would be suitable for its valuation? c) Can the...
WACC vs. Equity Residual Method
Hi! I was just wondering if Discounted Cash Flow using WACC and Equity Residual Method should yield the same result? I can't seem to get the same value. Thanks!
Notes for Technical Interview Questions
During a recent round of interviews with several banks, headhunters sent across a number of potential technical questions that they said I should be very comfortable with. However, through all of my interviews I was never actually asked any technical questions (although I did do a 3 hour modelling...
What discount rate do you use in your valuations?
Hi guys, was hoping I could get some insight on this esp. from those buysiders at long only value shops i currently work on the buy side focusing on resource sector companies, I don't think I've ever calculated a company's WACC outside of my MBA studies, we always use a 10% discount rate. The...
Is Line of Credit treated as LTD?
I am trying to figure out where a company's Line of Credit fits into my DCF model. I have a DCF model, using a WACC , where I am trying to find the equity value . The answer I receive after the sum of present values and residual value would be my enterprise value. I now need to deduct Long Term Debt...
Marginal Tax Rate for Private S Corporation (DCF Question)?
Hi monkeys. I am not quite sure what tax rate to use for my DCF when calculating the cost of debt. Should I go ahead and tax-affect with a corporate tax rate of 35% or 0% because it's a pass-through entity? Any suggestions?
Technical: Pre-tax WACC = unlevered cost of capital (APV)
I can derive the pre-tax wacc from an infinitely recursive cash flow stream, but why is this equivalent to using the "unlevered cost of capital"? Because this discount rate assumes a constant leverage ratio (i.e. fluctuating debt levels), how can it be that the PV of unlevered cash flows give the...
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