Debt and Value: Beyond MillerModigliani Aswath Damodaran Stern School of Business Aswath Damodaran 1 The fundamental question: Does the mix of debt and equity affect the value of a business? Assets Existing Investments Generate cashflows today Includes long lived (fixed) and short-lived(working capital) assets Expected Value that will be created by future investments Assets in Place Debt Liabilities Fixed Claim on cash flows Little or No role in management Fixed Maturity Tax
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January 31, 2012, and their 2011 10-K report was produced to the Securities and Exchange Commission thereafter. After review of the key financial statements, it was found that the balance sheet, income statement, cash flow statement, and stockholders’ equity statement remained consistent over the documented years. All figures reported below are in millions except for per share values, ratios, and percentages. The balance sheet reported on Home Depot’s 2011 10-K report analyzes both 2011 and 2010 fiscal
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Valuing Publicly Traded Equity Securities: The Black & Decker Corporation (BDK) [1] I. Introduction This teaching note describes the valuation of publicly traded equity securities using the Discounted Cash Flow (DCF) and Price/Characteristic (market comparison) approaches, with a specific spreadsheet example for The Black and Decker Corporation. Free cash flow valuation and comparables (comps) are key tools in fundamental analysis, the process of picking stocks with high expected return
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Average total assets Total liabilities Total assets Total equity Total assets Total liabilities Total equity Income before interest expense and income taxes Interest Expense Net Income Net Sales Cost of goods sold Net Sales Net Income Average total assets Net income Preferred dividents Average common stockholders equity Net Sales Measure of Short‐term debt‐paying ability (2:1 guideline) Immediate short‐term debt‐paying ability (1:1 guideline) Efficiency of collection (bigger is better)
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stability/expansion (i.e., multiple deliveries during a day to reduce the marginal cost of operational logistics as well as better utilization rates of trucks, equipment, drivers, etc.) 2. Project the financial statements for 1998 and project the need for financing? Projections for 1998 and a quarterly break-up of 1998 projections are provided below. Annual projections are based on historical margins assuming revenues of $3 Million. Quarterly projections replicate the proportionality of the 1997 quarterly
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which are essentially copies of the drugs, once the product reaches the end of the patent-protection period. At the time, MoGen had several drugs that faced the threat of biosimilar competition in Europe, all due to patent expiration. Mogen’s Financing Strategy By January of 2006, MoGen had five main products that had been derived from R&D initiatives. Due to the incredible success of this product lineup, MoGen was able to offset other unsuccessful R&D write-offs and report $12.4 billion in sales
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15 Debt Policy 1. a. True. b. False. As leverage increases, the expected rate of return on equity rises by just enough to compensate for its higher risk. The stock price and stockholders’ wealth are unaffected. c. False. The sensitivity of equity returns to business risk, and therefore the cost of equity, increase with leverage even without a change in the risk of financial distress. d. True. 2. While the costs of both debt and equity increase
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(both debt and equity), or, from an investor's point of view "the shareholder's required return on a portfolio of all the company's existing securities". It is used to evaluate new projects of a company as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet. Cost of debt The cost of debt is computed by taking the rate on a risk free bond whose duration matches the term structure of the corporate debt, then
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Importance of Capital Markets A capital market is a market for the trading of long term securities such as, but not limited to debt and equity securities. A capital market which includes bond markets and stock exchanges serves two major functions. Firstly, it acts as a primary market for issuing new equity and debt capital. This means that companies[1] who want to raise new financing for investment projects or business expansion can source funding via this market. Secondly, it also acts as a secondary
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Management 6 The extended trial balance To understand how to account for a series of common transactions Double-entry classification (Assets/Liabilities or debit/credit) At any given point of time, assets must always equal liabilities plus equity, and debits must always equal credits
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