【正文】 rm ? The approach remains the same with important caveats ? It is far more difficult estimating firm value, since the equity and the debt of private firms are not traded. ? Most private firms are not rated. ? If the cost of equity is based upon the market beta, it is possible that we might be overstating the optimal debt ratio, since private firm owners often consider all risk. Aswath Damodaran 43 Bookscape’s current cost of capital ? We assumed that Bookscape would have a debt to capital ratio of %, similar to that of publicly traded book panies, and that the tax rate for the firm is 40%. We puted a cost of capital based on that assumption. We also used a total beta of to measure the additional risk that the owner of Bookscape is exposed to because of his lack of diversification. Cost of equity = RiskFree Rate + Total Beta * Risk Premium = % + * 6% = % Pretax Cost of Debt = 6% (based on synthetic rating of A) Cost of Capital = % () + 6% (1 – )() = % Aswath Damodaran 44 The Inputs: Bookscape ? Although Bookscape has no conventional debt outstanding, it does have one large operating lease mitment. Given that the operating lease has 25 years to run and that the lease mitment is $750,000 for each year, the present value of the operating lease mitments is puted using Bookscape?s pretax cost of debt of 6%: Present value of Operating Lease Commitments (in thousands) = $750 (PV of annuity, 6%, 25 years) = $ 9,587 ? Bookscape had operating ine before taxes of $3 million in the most recent financial year, after depreciation charges of $400,000 and operating lease expenses of $750,000. We add back the imputed interest expense on the present value of lease expenses to the EBIT to arrive at an adjusted EBIT. Adjusted EBIT (in ?000s) = EBIT + Pretax Cost of Debt * PV of Operating Lease Expenses = $3,000 + * $9,587 = $3,575 ? To estimate the market value of equity, we looked at publicly traded book retailers and puted an average price to earnings ratio of 10 for these firms. Applying this multiple of earnings to Bookscape?s ine of $ million in 2020 yielded the equity value: Estimated Market Value of Equity (in ?000s) = Net Ine for Bookscape * Average PE for Publicly Traded Book Retailers = 1,500 * 10 = $15,000 Aswath Damodaran 45 Interest Coverage Ratios, Spreads and Ratings: Small Firms Aswath Damodaran 46 Optimal Debt Ratio for Bookscape Aswath Damodaran 47 Limitations of the Cost of Capital approach ? It is static: The most critical number in the entire analysis is the operating ine. If that changes, the optimal debt ratio will change. ? It ignores indirect bankruptcy costs: The operating ine is assumed to stay fixed as the debt ratio and the rating changes. ? Beta and Ratings: It is based upon rigid assumptions of how market risk and default risk get borne as the firm borrows more money and the resulting costs. Aswath Damodaran 48 II. Enhanced Cost of Capital Approach ? Distress cost affected operating ine: In the enhanced cost of capital approach, the indirect costs of bankruptcy are built into the expected operating ine. As the rating of the firm declines, the operating ine is adjusted to reflect the loss in operating ine that will occur when customers, suppliers and investors react. ? Dynamic analysis: Rather than look at a single number for operating ine, you can draw from a distribution of operating ine (thus allowing for different outes). Aswath Damodaran 49 Estimating the Distress Effect Disney Rating Drop in EBITDA A or higher No effect A % BBB % BB+ % B % CCC % D % Indirect bankruptcy costs manifest themselves, when the rating drops to A and then start being larger as the rating drops below investment grade. Aswath Damodaran 50 The Optimal Debt Ratio with Indirect Bankruptcy Costs The optimal debt ratio drops to 30% from the original putation of 40%. Aswath Damodaran 51 Extending this approach to analyzing Financial Service Firms ? Interest coverage ratio spreads, which are critical in determining the bond ratings, have to be estimated separately for financial service firms。desired Rating39。Aswath Damodaran 1 Capital Structure: Finding the Right Financing Mix Aswath Damodaran 2 The Big Picture.. Aswath Damodaran 3 Pathways to the Optimal ? The Cost of Capital Approach: The optimal debt ratio is the one that minimizes the cost of capital for a firm. ? The Enhanced Cost of Capital approach: The optimal debt ratio is the one that generates the best bination of (low) cost of capital and (high) operating ine. ? The Adjusted Present Value Approach: The optimal debt ratio is the one that maximizes the overall value of the firm. ? The Sector Approach: The optimal debt ratio is the one that brings the firm closes to its peer group in terms of financing mix. ? The Life Cycle Approach: The optimal debt ratio is the one that best suits where the firm is in its life cycle. Aswath Damodaran 4 I. The Cost of Capital Approach ? Value of a Firm = Present Value of Cash Flows to the Firm, discounted back at the cost of capital. ? If the cash flows to the firm are held constant, and the cost of capital is minimized, the value of the firm will be maximized. Aswath Damodaran 5 Measuring Cost of Capital ? It will depend upon: ? (a) the ponents of financing: Debt, Equity or Preferred stock ? (b) the cost of each ponent ? In summary, the cost of capital is the cost of each ponent weighted by its relative market value. WACC = ke (E/(D+E)) + kd (D/(D+E)) Aswath Damodaran 6 Recapping the Measurement of cost of capital ? The cost of debt is the market interest rate that the firm has to pay on its borrowing. It will depend upon three ponents (a) The general level of interest rates (b) The default premium (c) The firm39。 Equity A rec