【正文】 ue * Cost of Capital – CF to Firm)/(Firm Value + CF to Firm) = (61,875* – 4199)/(61,875 + 4,199) = or % ? Step 3: Revalue the firm with the new cost of capital Firm value = The firm value increases by $1,790 million (63,665 – 61,875 = 1,790) ??F CF F 0 (1 ? g)( Co s t of Ca 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。desired Rating39。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。 below which they do not want to fall. ? The rating constraint is driven by three factors ? it is one way of protecting against downside risk in operating ine (so do not do both) ? a drop in ratings might affect operating ine ? there is an ego factor associated with high ratings ? Caveat: Every Rating Constraint Has A Cost. ? Provide Management With A Clear Estimate Of How Much The Rating Constraint Costs By Calculating The Value Of The Firm Without The Rating Constraint And Comparing To The Value Of The Firm With The Rating Constraint. Aswath Damodaran 33 Ratings Constraints for Disney ? At its optimal debt ratio of 40%, Disney has an estimated rating of A. ? If managers insisted on a AA rating, the optimal debt ratio for Disney is then 30% and the cost of the ratings constraint is fairly small: Cost of AA Rating Constraint = Value at 40% Debt – Value at 30% Debt = $63,651 – $63,596 = $55 million ? If managers insisted on a AAA rating, the optimal debt ratio would drop to 20% and the cost of the ratings constraint would rise: Cost of AAA rating constraint = Value at 40% Debt – Value at 20% Debt = $63,651 $62,371 = $1,280 million Aswath Damodaran 34 3. What if you do not buy back stock.. ? The optimal debt ratio is ultimately a function of the underlying riskiness of the business in which you operate and your tax rate. ? Will the optimal be different if you invested in projects instead of buying back stock? ? No. As long as the projects financed are in the same business mix that the pany has always been in and your tax rate does not change significantly. ? Yes, if the projects are in entirely different types of businesses or if the tax rate is significantly different. Aswath Damodaran 35 The power of the cost of capital approach.. ? The intuition behind the cost of capital approach is simple. Firms should try to minimize the cost of overall funding that they raise. ? The approach is flexible and can be extended easily to ? Family group panies (Tata Chemicals) ? Companies with volatile earnings (Aracruz Celulose) ? Private panies (Bookscape) Aswath Damodaran 36 A. Family Group Companies in emerging