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Chart - Cost of Equity

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Cost of Equity and Beta: Debt Ratios

Beta

Cost of Equity

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Debt Ratio Beta Cost of Equity Bond Rating terest rate on de Tax Rate ost of Debt (after-ta

0% 1.58 12.82% AAA 6.80% 0.00% 6.80%

10% 1.76 13.53% D 18.50% 0.00% 18.50%20% 1.98 14.40% D 18.50% 0.00% 18.50%

30% 2.26 15.53% D 18.50% 0.00% 18.50%

40% 2.63 17.04% D 18.50% 0.00% 18.50%

50% 3.16 19.15% D 18.50% 0.00% 18.50%

60% 3.95 22.31% D 18.50% 0.00% 18.50%

70% 5.27 27.58% D 18.50% 0.00% 18.50%

80% 7.90 38.11% D 18.50% 0.00% 18.50%

90% 15.81 69.73% D 18.50% 0.00% 18.50%

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WACC irm Value (G)

12.82% $29,192

14.02% $24,56615.22% $21,143

16.42% $18,509

17.62% $16,419

18.82% $14,719

20.02% $13,311

21.22% $12,125

22.42% $11,112

23.62% $10,237

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CAPITAL STRUCTURE 17

When you open this program, you might find a warning about circular references. Before you input any

numbers, go into "options" or "preferences" under "tools", and choose "calculation". Check off the iteration box, if it is

not already chosen.

INPUT SHEET FOR CAPITAL STRUCTURE

Please enter the name of the company you are analyzing: Amazon

Please enter the following information on the company you are analysing:

Earnings before interest, taxes and depreciation (EBITD ($380.00) (in currency)

Depreciation and Amortization: $30.00 (in currency)

Capital Spending: $243.00 (in currency)

Interest expense on debt: $74.00 (in currency)

Current Rating on debt (if available): B (Rating)

Interest rate based upon rating: 10.50% (Look up table below for spread)

Tax rate on ordinary income: 0.00% (in percent)

Number of shares outstanding: 340.79 (in units)

Market price per share: $84.00 (in currency)

Beta of the stock: 1.6

Book value of debt: $349.00 (in currency)

Can you estimate the market value of the outstanding deb No (Yes or No)

If so, enter the market value of debt: (in currency)

Do you want me to try and estimate market value of debt No

If yes, ente r the average maturity of outstanding debt? 7.50 (in years)

[If you do not have the maturity of your debt available, enter an approximation - say, 10 years]

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CAPITAL STRUCTURE 18

Please enter the following market information:

Current short-term (ST) government rate: 5.50% (in percent)

Current long-term (LT) government rate: 6.50% (in percent)

Which rate would you like to use as the riskfree rate in the CAPM? LT (ST or LT)

Risk premium (for use in the CAPM) 4.00% (in percent)

Please enter the following information for computing ratings/spreads

The fol lowin g are the defaults used in the program:

If coverage ratio is

greater than to Rating is Spread over long bond is

-100000 0.2499999 D 12.00%

0.25 0.6699999 C 9.00%

0.67 0.8699999 CC 7.50%

0.87 1.2699999 CCC 6.00%

1.27 1.5699999 B- 5.00%

1.57 1.8699999 B 4.00%

1.87 2.1699999 B+ 3.00%

2.17 2.7599999 BB 2.50%

2.76 3.2899999 BBB 2.00%

3.29 4.4899999 A- 1.50%

4.49 5.649999 A 1.25%

5.65 6.849999 A+ 1.00%

6.85 9.349999 AA 0.70%

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CAPITAL STRUCTURE 20

Do you want to assume that existing debt is refinanced at the 'new' rate? Yes (Yes or No)

The rating estimated for the firm at its existing debt ratio may be different from its actual rating.

Do you want the firm's rating to be adjusted to the estimated rating? No (Yes or No)

THE OUTPUT FOLLOWS

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CAPITAL STRUCTURE 21

ANAL YZING CAPITAL STRUCTURE Amazon

INPUTS FOR ANAL YSIS

Capital Structure Financial Market Income Statement

Current MV of Equity = $28,626 Current Beta for Stock = 1.6 Current EBITDA = ($380)

Current Outstanding Debt = $349 Current Bond Rating = B Current Depreciation = $30# of Shares Outstanding = 340.79 Current T.Bill Rate = 5.50% Current Tax Rate = 0.00%

Riskless rate to use in CAPM 6.50% Current T. Bond Rate = 6.50% Current Cap ital Spending $243

Risk Premium = 4.00% Current Interest Rate = 10.50% Current Interest Expense $74.00

RESULTS FROM ANALYSIS

Current Optimal Change

D/(D+E) Ratio = 1.20% 0.00% -1.20%

Beta for the Stock = 1.6 1.58 -0.02

Cost of Equity = 12.90% 12.82% -0.08%

AT Interest Rate on Debt 10.50% 6.80% -3.70%

WACC 12.87% 12.82% -0.05%

Implied Growth Rate = 6.00%

Market Value of Firm (C) $28,975 $29,084 $109

Market Value of Firm (G) $28,975 $29,192 $217

Market Price/share (C) = $84.00 $84.32 $0.32

Market Price/share (G) = $84.00 $84.64 $0.64

We use the following default spreads in our analysis. Change them in the input sheet if necessary Ratings comparison at current debt ratio

Rating Coverage gt and lt Spread Current Interest coverage ratio = -5.54

AAA 9.65 100000 0.30% Rating based upon coverage = D

AA 6.85 9.35 0.70% Interest rate based upon coverage = 0.185

A+ 5.65 6.849999 1.00% Current rating for company = B

A 4.49 5.649999 1.25% Current interest rate on debt = 10.50%

A- 3.29 4.4899999 1.50%

BBB 2.76 3.2899999 2.00%

BB 2.17 2.7599999 2.50%

B+ 1.87 2.1699999 3.00%

B 1.57 1.8699999 4.00%

B- 1.27 1.5699999 5.00%

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CAPITAL STRUCTURE 22

CCC 0.87 1.2699999 6.00%

CC 0.67 0.8699999 7.50%

C 0.25 0.6699999 9.00%

D -100000 0.2499999 12.00%

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CAPITAL STRUCTURE 23

Current beta= 1.60 Current Equity= $28,626 Current Depreciation= $30

Current Debt= $349 Current EBITDA= ($380) Current Interest rate (Company)= 10.50%

Tax rate= 0.00% Current Rating= B Current T.Bond rate= 6.50%

Six-month T.Bill rate= 5.50%

WORKSHEET FOR ESTIM ATI NG RATI NGS/IN TEREST RATESD/(D+E) 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00%

D/E 0.00% 11.11% 25.00% 42.86% 66.67% 100.00% 150.00% 233.33% 400.00% 900.00%

$ Debt $0 $2,898 $5,795 $8,693 $11,590 $14,488 $17,385 $20,283 $23,180 $26,078

Beta 1.58 1.76 1.98 2.26 2.63 3.16 3.95 5.27 7.90 15.81

Cost of Equity 12.82% 13.53% 14.40% 15.53% 17.04% 19.15% 22.31% 27.58% 38.11% 69.73%

EBITDA ($380) ($380) ($380) ($380) ($380) ($380) ($380) ($380) ($380) ($380)

Depreciation $30 $30 $30 $30 $30 $30 $30 $30 $30 $30

EBIT ($410) ($410) ($410) ($410) ($410) ($410) ($410) ($410) ($410) ($410)

Interest $0 $536 $1,072 $1,608 $2,144 $2,680 $3,216 $3,752 $4,288 $4,824Taxable Income ($410) ($946) ($1,482) ($2,018) ($2,554) ($3,090) ($3,626) ($4,162) ($4,698) ($5,234)

Tax $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Net Income ($410) ($946) ($1,482) ($2,018) ($2,554) ($3,090) ($3,626) ($4,162) ($4,698) ($5,234)

(+)Deprec'n $30 $30 $30 $30 $30 $30 $30 $30 $30 $30

Funds from Op. ($380) ($916) ($1,452) ($1,988) ($2,524) ($3,060) ($3,596) ($4,132) ($4,668) ($5,204)

Pre-tax Int. cov -0.76 -0.38 -0.25 -0.19 -0.15 -0.13 -0.11 -0.10 -0.08

Funds Int. Cov -1.71 -1.35 -1.24 -1.18 -1.14 -1.12 -1.10 -1.09 -1.08

Funds/Debt -0.32 -0.25 -0.23 -0.22 -0.21 -0.21 -0.20 -0.20 -0.20

Likely Rating AAA D D D D D D D D D

Interest Rate 6.80% 18.50% 18.50% 18.50% 18.50% 18.50% 18.50% 18.50% 18.50% 18.50%

Eff. Tax Rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

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CAPITAL STRUCTURE 24

WORKSHEET FOR CALCULATI NG WEIGH TED AVERAGE COST OF CAPITAL

D/(D+E) 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00%

D/E 0.00% 11.11% 25.00% 42.86% 66.67% 100.00% 150.00% 233.33% 400.00% 900.00%

$ Debt $0 $2,898 $5,795 $8,693 $11,590 $14,488 $17,385 $20,283 $23,180 $26,078

Cost of equity 12.82% 13.53% 14.40% 15.53% 17.04% 19.15% 22.31% 27.58% 38.11% 69.73%

Cost of debt 6.80% 18.50% 18.50% 18.50% 18.50% 18.50% 18.50% 18.50% 18.50% 18.50%

WACC 12.82% 14.02% 15.22% 16.42% 17.62% 18.82% 20.02% 21.22% 22.42% 23.62%

Firm Value (C) $29,084 $26,595 $24,499 $22,709 $21,162 $19,813 $18,626 $17,573 $16,632 $15,787

Firm Value (G) $29,192 $24,566 $21,143 $18,509 $16,419 $14,719 $13,311 $12,125 $11,112 $10,237

*Firm Value (C): No growth in savings. New Firm Value=Current Firm value +{(WACC(current)-New WACC)*Current firm value/New WACC}

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CAPITAL STRUCTURE 25

*Firm Value (G): Savings grow. New Firm Value = (EBIT*(1-t)+Depreciation-Capital Spending)/(New WACC-g)

The program uses the following interest coverage ratios and ratings relationships. You can modify them on the input sheet.

The interest rates are automatically updated when the T.Bond rate is entered.

Interest cov Interest cov RATING Interest rateLow High

-100000 0.2499999 D 18.50%

0.25 0.6699999 C 15.50%

0.67 0.8699999 CC 14.00%

0.87 1.2699999 CCC 12.50%

1.27 1.5699999 B- 11.50%

1.57 1.8699999 B 10.50%

1.87 2.1699999 B+ 9.50%

2.17 2.7599999 BB 9.00%

2.76 3.2899999 BBB 8.50%

3.29 4.4899999 A- 8.00%

4.49 5.649999 A 7.75%

5.65 6.849999 A+ 7.50%

6.85 9.349999 AA 7.20%

9.65 100000 AAA 6.80%