WACC - P&G.pdf
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Transcript of WACC - P&G.pdf
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8/9/2019 WACC - P&G.pdf
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WACC
Procter&Gamble:CostofCapital
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WhyP&Gs
WACC?
Largeclientwantedtoenterhouseholdproductsandcompete
withP&G
detergents,
soaps,
cleansers,
and
personal
care
Cost
of
capital
of
the
client
not
feasible
due
to
Highlydiversifiedconglomerateunrelatedbusiness
OverallWACC
not
useful
for
existing
subsidiaries
OverallWACCnotusefulfornew
business
consumerproducts
Laundry
and
cleaning
products
35%
Personal
care
products
49%
Foodand
beverage
s
15%
Pulpand
chemicals
1%
Sales
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NeedforWACC
Evaluate
/
reevaluate
thenew andexistinginvestmentsrespectively
Earnmorethanhurdle
rate
Comparedifferentwaysoffinancingits
operations
Keyvariableforvaluationmodels
Ko=(ke*we)
+(kd*(1
t)*we)
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Costof
Debt?
Interest bearing debt on Books 3,331
Interest Expenses - 1989 391
Traded Coupon issues 8.25%
YTM (close to Aaa 9.22%) 9.18% Why not 9.22%?
Year to maturity 15
Bond price 92.25 Exhibit 1 Panel D
1989 Dec 1990 Jan 1990 Feb
US Treasury Bonds
5-Year 7.75 8.12 8.42
10-Year 7.84 8.21 8.47
30-Year 7.90 8.26 8.50Corporate Bonds by Moody's Rating
Aaa 8.86 8.99 9.22
Aa 9.11 9.27 9.45
A 9.39 9.54 9.75
Baa 9.82 9.94 10.14
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Costof
Debt?
Interest bearing debt on Books 3,331
Interest Expenses - 1989 391
Traded Coupon issues 8.25%
YTM (close to Aaa 9.22%) 9.18% Why not 9.22%?
Year to maturity 15
Bond price 92.25 Exhibit 1 Panel D
1989 Dec 1990 Jan 1990 Feb
US Treasury Bonds
5-Year 7.75 8.12 8.42
10-Year 7.84 8.21 8.47
30-Year 7.90 8.26 8.50Corporate Bonds by Moody's Rating
Aaa 8.86 8.99 9.22
Aa 9.11 9.27 9.45
A 9.39 9.54 9.75
Baa 9.82 9.94 10.14
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Costof
Equity
Past 10 Years Past 5 Years Estimated Next 5 Years
Sales 7.60 10.20 8.00Earnings 7.00 5.90 15.50
Dividends 6.50 4.60 11.00
Gorwth Rate
1989 Dec 1990 Jan 1990 Feb
US Treasury Bonds
5-Year 7.75 8.12 8.42
10-Year 7.84 8.21 8.47
30-Year 7.90 8.26 8.50
Corporate Bonds by Moody's Rating
Aaa 8.86 8.99 9.22
Aa 9.11 9.27 9.45
A 9.39 9.54 9.75
Baa 9.82 9.94 10.14
1989 Dec 1990 Jan 1990 Feb
Money Market Rates
CP (3 Months) 8.32 8.16 8.22
Eurodollar Deposits ( 3 Months) 8.39 8.22 8.24
US Treasury Bills
3 Months 7.63 7.64 7.74
1 - Year 7.21 7.38 7.55Prime rate charged by Banks 10.50 10.11 10.00
1988 1989
Current stock price 126.25
No. of shares (Millions) 170
Market Cap (Millions) 21462.5
Book Value of Equity 6337 7076
Book Value of Debt 3364 3331
Market Value Weight of Equity 86.57%
Book Value Weight of Equity 67.99%
Traget Value Weight of Equity 65%
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Costof
Equity
Past 10 Years Past 5 Years Estimated Next 5 Years
Sales 7.60 10.20 8.00Earnings 7.00 5.90 15.50
Dividends 6.50 4.60 11.00
Gorwth Rate
1989 Dec 1990 Jan 1990 Feb
US Treasury Bonds
5-Year 7.75 8.12 8.42
10-Year 7.84 8.21 8.47
30-Year 7.90 8.26 8.50
Corporate Bonds by Moody's Rating
Aaa 8.86 8.99 9.22
Aa 9.11 9.27 9.45
A 9.39 9.54 9.75
Baa 9.82 9.94 10.14
1989 Dec 1990 Jan 1990 Feb
Money Market Rates
CP (3 Months) 8.32 8.16 8.22
Eurodollar Deposits ( 3 Months) 8.39 8.22 8.24
US Treasury Bills
3 Months 7.63 7.64 7.74
1 - Year 7.21 7.38 7.55Prime rate charged by Banks 10.50 10.11 10.00
1988 1989
Current stock price 126.25
No. of shares (Millions) 170
Market Cap (Millions) 21462.5
Book Value of Equity 6337 7076
Book Value of Debt 3364 3331
Market Value Weight of Equity 86.57%
Book Value Weight of Equity 67.99%
Traget Value Weight of Equity 65%
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ke=Rf+
(Rm Rf)
*LongTerm
vs.Short
Term
*TopDown
vs.Bottom
Up*Leveredvs.
Unlevered
*GMvs.
AM
NonTradedAssets?
PrivateFirms?
Reconstitutionof
firms?
Ifnegative?*Current?
Historical?
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Ko=(ke*we)
+(kd*(1
t)*we)
Marketvs.
Bookvs.
Target
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Leveredand
Unlevered
Beta
E
D*t)-1(+1
=
]ED*t)-1(+1[=
LU
UL
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Effectof
Leverage
on
Beta
11
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CreditRating
and
Key
Financial
Ratios
AAA AA A BBB BB B
EBIT interest coverage (x) 23.4 13.3 6.3 3.9 2.2 1
Funds from operations/total debt (%) 214.2 65.7 42.2 30.6 19.7 10.4
Free operating cash flow/total debt (%) 156.6 33.6 22.3 12.8 7.3 1.5
Return on capital (%) 35 26.6 18.1 13.1 11.5 8
Operating income/sales (%) 23.4 24 18.1 15.5 15.4 14.7LT debt/capital (%) -1.1 21.1 33.8 40.3 53.6 72.6
Total-debt/capital, incl. Short-term debt (%) 5 35.9 42.6 47 57.7 75.1
Non-Investment GradeInvestment GradeKey Industrial Financial Ratios by Credit Rating
12
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So,WhatistheWACCforP&G?
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EffectiveTax
Rate
2014 2013 2012 2011 2010 2009 2008 2007 2006 2005
ITC 30.60% 30.57% 30.74% 31.38% 32.49% 32.37% 31.75% 31.24% 30.67% 27.61%
HUL 23.09% 23.42% 22.42% 21.49% 21.90% 16.80% 17.28% 15.18% 13.28% 19.37%
UBL 24.56% 23.38% 27.08% 31.52% 32.59% 48.10% 45.57% 51.40% 56.70% 29.85%
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IsWACCofP&GandClient
comparable?
P&Ghasa
dominantmarket
shareclientisanewentrants
Smallin
size
to
matchtheP&G
IssuesofLeverageDifferences
IssuesofBusinessRisk