【正文】 a p i t a l g) ? 4, 1 9 9 ( 1 + g)( . 0 7 5 1 g)??F CF F 0 (1 ? g)( Co s t o f Ca pi t a l g) ? 4, 19 9 ( 8)( . 07 32 8) ? $ 63 , 665 m i l l i onAswath Damodaran 25 Effect on Value: Capital Structure Isolation… ? In this approach, we start with the current market value and isolate the effect of changing the capital structure on the cash flow and the resulting value. ? Firm Value before the change = 45,193 + $16,682 = $61,875 million WACCb = % Annual Cost = 61,875 * = $4, million WACCa = % Annual Cost = 61,875 * = $ 4, million ??WACC = % Change in Annual Cost = $ million ? If we assume a perpetual growth of % in firm value over time, Increase in firm value = ? The total number of shares outstanding before the buyback is million. Change in Stock Price = $1,763/ = $ per share ??A nnu a l S a vi n g s ne xt ye a r( Co s t of Ca pi t a l g ) ? $17 . 1 4( 0 . 0 732 0. 0 068) ? $ 1 , 763 m i l l i onAswath Damodaran 26 A Test: The Repurchase Price ? Let us suppose that the CFO of Disney approached you about buying back stock. He wants to know the maximum price that he should be willing to pay on the stock buyback. (The current price is $ and there are million shares outstanding). If we assume that investors are rational, ., that the investor who sell their shares back want the same share of firm value increase as those who remain: ? Increase in Value per Share = $1,763/ = $ ? New Stock Price = $ + $= $ Buying shares back $ will leave you as a stockholder indifferent between selling and not selling. ? What would happen to the stock price after the buyback if you were able to buy stock back at $ ? Aswath Damodaran 27 Buybacks and Stock Prices ? Assume that Disney does make a tender offer for it?s shares but pays $27 per share. What will happen to the value per share for the shareholders who do not sell back? a. The share price will drop below the preannouncement price of $ b. The share price will be between $ and the estimated value (above) of $ c. The share price will be higher than $ Aswath Damodaran 28 2. What if something goes wrong? The Downside Risk ? Doing Whatif analysis on Operating Ine ? A. Statistical Approach – Standard Deviation In Past Operating Ine – Standard Deviation In Earnings (If Operating Ine Is Unavailable) – Reduce Base Case By One Standard Deviation (Or More) ? B. “Economic Scenario” Approach – Look At What Happened To Operating Ine During The Last Recession. (How Much Did It Drop In % Terms?) – Reduce Current Operating Ine By Same Magnitude ? Constraint on Bond Ratings Aswath Damodaran 29 Disney’s Operating Ine: History Aswath Damodaran 30 Disney: Effects of Past Downturns Recession Decline in Operating Ine 2020 Drop of % 1991 Drop of % 198182 Increased Worst Year Drop of % ? The standard deviation in past operating ine is about 20%. Aswath Damodaran 31 Disney: The Downside Scenario Aswath Damodaran 32 Constraints on Ratings ? Management often specifies a 39。s tax rate ? The cost of equity is 1. the required rate of return given the risk 2. inclusive of both dividend yield and price appreciation ? The weights attached to debt and equity have to be market value weights, not book value weights. Aswath Damodaran 7 Costs of Debt amp。 applying manufacturing pany spreads will result in absurdly low ratings for even the safest banks and very low optimal debt ratios. ? It is difficult to estimate the debt on a financial service pany?s balance sheet. Given the mix of deposits, repurchase agreements, shortterm financing, and other liabilities that may appear on a financial service firm?s balance sheet, one solution is to focus only on longterm debt, defined tightly, and to use interest coverage ratios defined using only longterm interest expenses. ? Financial service firms are regulated and have to meet capital ratios that are defined in terms of book value. If, in the process of moving to an optimal market value debt ratio, these firms violate the book capital ratios, they could put themselves in jeopardy. Aswath Damodaran 52 An alternative approach based on Regulatory Capital ? Rather than try to bend the cost of capital approach to breaking point, we will adopt a different approach for financial service firms where we estimate debt capacity based on regulatory capital. ? Consider a bank with $ 100 million in loans outstanding and a book value of equity of $ 6 million. Furthermore, assume that the regulatory requirement is that equity capital be maintained at 5% of loans outstanding. Finally, assume that this bank wants to increase its loan base by $ 50 million to $ 150 million and to augment its equity capital ratio to 7% of loans outstanding. Loans outstanding after Expansion = $ 150 million Equity/Capital ratio desired = 7% Equity after expansion = $ million Existing Equity = $ million New Equity needed = $ million Aswath Damodaran 53 Financing Strategies for a financial institution ? The Regulatory minimum strategy: In this strategy, financial service firms try to stay with the bare minimum equity capital, as required by the regulatory ratios. In the most aggressive versions of this strategy, firms exploit loopholes in the regulatory framework to invest in those businesses where regulatory capital ratios are set too low (relative to the risk of these businesses). ? The Selfregulatory strategy: The objective for a bank raising equity is not to meet regulatory capital ratios but to ensure that losses from the business can be covered by the existing equity. In effect, financial service firms can assess how much equity they need to hold by evaluating the riskiness of their businesses and the potential for losses. ? Combination strategy: In this