PRELIMINARY STUFF AND INPUTS

Objective This spreadsheet allows you to compute the optimal capital structure for a non-financial
service firm
Before you start Open preferences in excel, go into calculation options and put a check in the iteration box.
If it is already checked, leave it as is.
Inputs The inputs are primarily in the input sheet. If your company has operating leases,
use the operating lease worksheet to enter your lease or rental commitments.
Units Enter all numbers in the same units (000s, millions or even billions)
Income inputs The key income input is the earnings before long term interest expenses and depreciation
Enter the most updated numbers you have for each (even if they are 12-month trailing
numbers). If the most recent period for which you have data has an operating income that
is abnormal, either because of extraordinary losses/gains or some other occurrence, use
an average operating income over the last few years.
Balance Sheet Enter the book value of total debt. If you have a market value enter that
number. Alternatively, input the average maturity of the debt and I will estimate the
market value of debt.
Market Data Enter the current stock price, the current risk free rate, the equity risk
premium you would like to use to estimate your cost of equity and the current rating for
your firm. If you do not have a rating, there is an option for you at the very bottom of
the spreadsheet to compute a synthetic rating.
Tax Rate Enter a marginal tax rate, if you can find it. Otherwise, use the marginal tax rate of country
Default Spreads This spreadsheet has interest coverage ratios, ratings and default spreads built into it in
the worksheet. You can choose between two tables, one for large and stable
firms, and the other for small or risky firms. If you want you can change the interest
coverage ratios and ratings in these tables.
READING THE OUTPUT
Summary The summary provides a picture of your firm's current cost of capital and debt ratio, and
compares it to your firm's optimal debt ratio and the cost of capital at that level. The
firm value is computed at each debt ratio, based upon how the expected operating income
and the cost of capital. The optimal debt ratio is that ratio at which firm value is
maximized. It might not be the same point at which cost of capital is minimized.
Details The details of the calculation at each debt ratio are below the summary.

References
Corporate Finance: Theory and Practice, Chapter 18
Applied Corporate Finance: Chapter 8
 ure for a non-financial

heck in the iteration box.

operating leases,

penses and depreciation.

are 12-month trailing
n operating income that
other occurrence, use

I will estimate the

d the current rating for

t the very bottom of

arginal tax rate of country

spreads built into it in

change the interest

ital and debt ratio, and

al at that level. The
pected operating income
h firm value is
l is minimized.
 Question
Q1: What do I do excel says there are circular

Q2: My spreadsheet has gone crazy. I get

errors all over. What did I do wrong?

Q3: I am entering the inputs for my company

but the optimal numbers do not seem to
change from the originals.

Q4: I am getting an optimal debt ratio of 0%.

This can't be right. Can it?

Q5: My cost of capital at my optimal debt ratio

than the current cost of capital. I thought it w
to be lower.

Q6: I am getting an optimal debt ratio at a mix

of capital is not minimized? Is something wron
 Answer
Go into preferences, choose calculation options and make sure the iteration box has a check in it.
I am sorry to say this, but you probably just made an input error. While you
might have fixed it, the iterations in the spreadsheet make it very sensitive
and the errors will not go away. The only fix (Sorry, sorry…) is to copy the
inputs into a fresh version of the spreadsheet.

You probably forgot to check the iteration box (see Q1)

Sure. If your operating income is either negative or very low, relative to your firm value,
you can end up at an optimal debt ratio of 0%. For instance, if you have EBIT of 100 on a
firm value of 10000, a 10% debt ratio would probably push you into a C rating and give
you a very high cost of capital.
Generally, you are right. However, I would suggest that you look at three factors:
- If your optimal is just slightly higher or lower than your current debt ratio, it is possible that you
are closer to the optimal than the stated optimal. Let me explain. Assume that you are at a 24% debt ratio
and the optimal comes out to 30%. The true optimal is really somewhere around 30% since
I am constrained to work in 10% increments of the debt ratio. If the true optimal were
26%, your current debt ratio of 24% is closer to the optimal.
- Rating Differences: One of the costs of rating a company based only on the interest
coverage ratio is that the rating might be very different from the actual rating. Thus, your
current cost of capital is based upon your current rating, and the optimal is based upon
the synthetic ratings, and the two don't match, the current and the optimal cost of capital
can be mismatched. You can get around this by switching to a synthetic rating for computing
the current cost of capital (in the input sheet).
- Existing debt at low rates: I assume in the spreadsheet that existing debt gets refinanced at
the new pre-tax cost of debt at each debt ratio. Consequently, if you have a lot of old debt on
your books at much lower rates, the interest expense that I report will be much higher than
your actual interest expense. This, in turn, can affect your interest coverage ratio and rating.
This, too, you can fix by locking in debt at current rates in the input sheet.
Not necessarily. If you chose to build in indirect bankruptcy costs (an option on the input page),
your operating income also changes as your debt ratio changes. Since the objective ultimately is to
maximize firm value, it is possible that the net effect (lower cost of capital is good but it could be offset
by lower operating income) is resulting in an optimal at a higher debt ratio.
In December 2017, Congress passed a major tax reform that not only lowered the tax rate for US companies but alao imposed limits on inte
deductions for tax purposes. Starting in 2018, interest will be deductible, for tax purposes, only if it is less than 30% of taxable income. How
Congress in its wisdom has defined EBITDA as taxable income until 2022 and EBIT thereafter. I have added an option to the spreadsheet to
to incorporate this limit. If you are working with a company outside the US, just set the option to constrain interest expenses to no and you
ready to go.
Important: This spreadsheet includes circular references, by design. Please go into calculation options and check the iteration box
Inputs
Please enter the name of the company you are analyzing Facebook
Please enter the date that you are doing this analysis Jan-19
Financial Information
Earnings before interest expenses, depreciation & amort $19,565.00
Depreciation and Amortization: $2,081.00
Capital Spending: $5,739.00
Interest expense on debt: $10.00
Marginal tax rate to use for pre-tax cost of debt 40.00%
Current Bond Rating on debt (if available): Not rated
Enter the current pre-tax cost of debt for your company 3.22%
Market Information & information on debt
Number of shares outstanding: 2905.8
Market price per share: $190.00
Beta of the stock: 1.0500
Cash and marketable securities = $38,289.00
Book value of debt: $ -
Can you estimate the market value of the interest beari No
If so, enter the market value of "interest bearing" debt:
Do you want me to try and estimate market value of deb No
If yes, enter the weighted average maturity of outstandi 7.92
Do you have any operating leases? Yes
Interest deduction constraints
Are there any restrictions on interest deductions for tax No
If yes, what earnings or operating measure is the restrict EBITDA
Enter the maximum percentage of that measure that is d 30.00%
Indirect bankruptcy costs & ratings constraints (if any)
Do you want to incorporate indirect bankruptcy costs in No
If yes, specify the magnitude of your indirect bankruptcy Medium
General Market Data
Current riskfree rate in the currency of analysis = 2.55%
Risk premium (for use in the CAPM) 5.96%
Country Default spread (for cost of debt) 0.00%

General Data
Which spread/ratio table would you like to use for your 1
Do you want to assume that existing debt is refinanced a Yes (Yes or No)
Do you want the firm's current rating & cost of debt to b Yes (Yes or No)
 but alao imposed limits on interst tax
han 30% of taxable income. However,
d an option to the spreadsheet to allow you
interest expenses to no and you should be

ions and check the iteration box.

Output Summary
Current Optimal
Debt to Capit 0.38% 20.00%
Cost of capita 8.78% 8.25%
Enterprise va $515,899 $564,070
Value per sha $190.00 $206.58
For details, check "Optimal Capital Structure" worksheet

Circular Reasoning/ IterationI: When you

open this spreadsheet, you may be warned
that there is circular reasoning. That is a
feature, not a bug, since I need to use circular
reasoning to get to the interest rate at each
level of debt. To get the spreadsheet working
properly, go to Calculation options in Excel
and make sure the iteraion box is checked.
Country 2017
Afghanistan 20.00%
Albania 15.00%
Algeria 26.00%
Andorra 10.00%
Angola 30.00%
Anguilla 0.00%
Antigua and Barbuda 25.00%
Argentina 35.00%
Armenia 20.00%
Aruba 25.00%
Australia 30.00%
Austria 25.00%
Azerbaijan 20.00%
Bahamas 0.00%
Bahrain 0.00%
Bangladesh 25.00%
Barbados 25.00%
Belarus 18.00%
Belgium 33.99%
Benin 30.00%
Bermuda 0.00%
Bolivia 25.00%
Bonaire, Saint Eustatius and 25.00%
Bosnia and Herzegovina 10.00%
Botswana 22.00%
Brazil 34.00%
Brunei Darussalam 18.50%
Bulgaria 10.00%
Burkina Faso 27.50%
Burundi 30.00%
Cambodia 20.00%
Cameroon 33.00%
Canada 26.50%
Cayman Islands 0.00%
Chile 25.50%
China 25.00%
Colombia 34.00%
Congo (Democratic Republic 35.00%
Costa Rica 30.00%
Croatia 20.00%
Curacao 22.00%
Cyprus 12.50%
Czech Republic 19.00%
Denmark 22.00%
Djibouti 25.00%
Dominica 25.00%
Dominican Republic 27.00%
Ecuador 22.00%
Egypt 22.50%
El Salvador 30.00%
Estonia 20.00%
Ethiopia 30.00%
Fiji 20.00%
Finland 20.00%
France 33.33%
Gabon 30.00%
Gambia 31.00%
Georgia 15.00%
Germany 29.79%
Ghana 25.00%
Gibraltar 10.00%
Greece 29.00%
Grenada 30.00%
Guatemala 25.00%
Guernsey 0.00%
Honduras 25.00%
Hong Kong SAR 16.50%
Hungary 9.00%
Iceland 20.00%
India 30.00%
Indonesia 25.00%
Iraq 15.00%
Ireland 12.50%
Isle of Man 0.00%
Israel 24.00%
Italy 24.00%
Ivory Coast 25.00%
Jamaica 25.00%
Japan 30.86%
Jersey 20.00%
Jordan 20.00%
Kazakhstan 20.00%
Kenya 30.00%
Korea, Republic of 22.00%
Kuwait 15.00%
Kyrgyzstan 10.00%
Latvia 15.00%
Lebanon 15.00%
Libya 20.00%
Liechtenstein 12.50%
Lithuania 15.00%
Luxembourg 27.08%
Macau 12.00%
Macedonia 10.00%
Madagascar 20.00%
Malawi 30.00%
Malaysia 24.00%
Malta 35.00%
Mauritius 15.00%
Mexico 30.00%
Moldova 12.00%
Monaco 33.33%
Mongolia 25.00%
Montenegro 9.00%
Morocco 31.00%
Mozambique 32.00%
Myanmar 25.00%
Namibia 32.00%
Netherlands 25.00%
New Zealand 28.00%
Nicaragua 30.00%
Nigeria 30.00%
Norway 24.00%
Oman 15.00%
Pakistan 31.00%
Palestinian Territory 15.00%
Panama 25.00%
Papua New Guinea 30.00%
Paraguay 10.00%
Peru 29.50%
Philippines 30.00%
Poland 19.00%
Portugal 21.00%
Qatar 10.00%
Romania 16.00%
Russia 20.00%
Rwanda 30.00%
Saint Kitts and Nevis 33.00%
Saint Lucia 30.00%
Saint Vincent and the Grenad 32.50%
Samoa 27.00%
Saudi Arabia 20.00%
Senegal 30.00%
Serbia 15.00%
Sierra Leone 30.00%
Singapore 17.00%
Sint Maarten (Dutch part) 34.50%
Slovakia 21.00%
Slovenia 19.00%
Solomon Islands 30.00%
South Africa 28.00%
Spain 25.00%
Sri Lanka 28.00%
St Maarten 34.50%
Sudan 35.00%
Suriname 36.00%
Swaziland 27.50%
Sweden 22.00%
Switzerland 17.77%
Syria 28.00%
Taiwan 17.00%
Tanzania 30.00%
Thailand 20.00%
Trinidad and Tobago 25.00%
Tunisia 25.00%
Turkey 20.00%
Turkmenistan 20.00%
Turks and Caicos Islands 0.00%
Uganda 30.00%
Ukraine 18.00%
United Arab Emirates 55.00%
United Kingdom 19.00%
United States 24.00%
Uruguay 25.00%
Uzbekistan 7.50%
Vanuatu 0.00%
Venezuela 34.00%
Vietnam 20.00%
Yemen 20.00%
Zambia 35.00%
Zimbabwe 25.00%
Africa average 28.21%
Americas average 25.66%
Asia average 21.28%
EU average 21.51%
Europe average 19.54%
Global average 24.25%
Latin America average 27.98%
North America average 23.75%
Oceania average 28.67%
OECD average 24.07%
South America average 27.98%
 Operating Lease Converter
Operating lease expenses are really financial expenses, and should be treated as such. Accounting standards allow th
be treated as operating expenses. This program will convert commitments to make operating leases into debt and
adjust the operating income accordingly, by adding back the imputed interest expense on this debt.

Inputs
Operating lease expense in current year = $269.00
Operating Lease Commitments (From footnote to financials)
Year Commitment ! Year 1 is next year, ….
1 $ 277.00
2 $ 284.00
3 $ 272.00
4 $ 256.00
5 $ 220.00
6 and beyond $ 1,131.00

Pre-tax Cost of Debt = 3.24% ! If you do not have a cost of debt, use the attached ratings estimator

From the current financial statements, enter the following

Reported Operating Income (EBIT) = $17,484.00 ! This is the EBIT reported in the current income statement
Reported Interest Expenses = $10.00
Output
Number of years embedded in yr 6 estima 4 ! I use the average lease expense over the first five years
to estimate the number of years of expenses in yr 6
Converting Operating Leases into debt
Year Commitment Present Value
1 $ 277.00 $268.31
2 $ 284.00 $266.45
3 $ 272.00 $247.19
4 $ 256.00 $225.35
5 $ 220.00 $187.58
6 and beyond $ 282.75 $891.00 ! Commitment beyond year 6 converted into an annuity for ten years
Debt Value of leases = $ 2,085.87

Restated Financials
Operating Income with Operating leases reclassified as debt = $17,521.24
Interest expenses with Operating leases classified as debt = $ 77.58
Depreciation with operating leases classified as debt = $ 2,312.76
unting standards allow them to
g leases into debt and
Inputs for synthetic rating estimation
Enter the type of firm = 1 (Enter 1 if large financial service firm, 2 if smaller financial service firm)
Earnings before interest and taxes (EBIT) = $17,521.24 (Add back only long term interest expense for financial f
Current interest expenses = $77.58 (Use only long term interest expense for financial firms)
Current long term government bond rate = 2.55%
Output
Interest coverage ratio = 225.84
Estimated Bond Rating = Aaa/AAA
Estimated Default Spread = 0.69%
Estimated Cost of Debt = 3.24%

For large manufacturing firms

If interest coverage ratio is
> ≤ to Rating is Spread is Drop in EBITDA
-100000 0.199999 D2/D 17.44% -50.00%
0.2 0.649999 C2/C 13.09% -40.00%
0.65 0.799999 Ca2/CC 9.97% -40.00%
0.8 1.249999 Caa/CCC 9.46% -40.00%
1.25 1.499999 B3/B- 5.94% -25.00%
1.5 1.749999 B2/B 4.86% -20.00%
1.75 1.999999 B1/B+ 4.05% -20.00%
2 2.2499999 Ba2/BB 2.77% -20.00%
2.25 2.49999 Ba1/BB+ 2.31% -20.00%
2.5 2.999999 Baa2/BBB 1.71% -10.00%
3 4.249999 A3/A- 1.33% -2.00%
4.25 5.499999 A2/A 1.18% 0.00%
5.5 6.499999 A1/A+ 1.07% 0.00%
6.5 8.499999 Aa2/AA 0.85% 0.00%
8.50 100000 Aaa/AAA 0.69% 0.00%

For smaller and riskier firms

If interest coverage ratio is
greater than ≤ to Rating is Spread is Drop in EBITDA
-100000 0.499999 D2/D 17.44% -50.00%
0.5 0.799999 C2/C 13.09% -40.00%
0.8 1.249999 Ca2/CC 9.97% -40.00%
1.25 1.499999 Caa/CCC 9.46% -40.00%
1.5 1.999999 B3/B- 5.94% -25.00%
2 2.499999 B2/B 4.86% -20.00%
2.5 2.999999 B1/B+ 4.05% -20.00%
3 3.499999 Ba2/BB 2.77% -20.00%
3.5 3.9999999 Ba1/BB+ 2.31% -20.00%
4 4.499999 Baa2/BBB 1.71% -10.00%
4.5 5.999999 A3/A- 1.33% -2.00%
6 7.499999 A2/A 1.18% 0.00%
7.5 9.499999 A1/A+ 1.07% 0.00%
9.5 12.499999 Aa2/AA 0.85% 0.00%
12.5 100000 Aaa/AAA 0.69% 0.00%
nterest expense for financial firms)
t expense for financial firms)
 CAPITAL STRUCTURE 17

Facebook
January 1, 2019 Drivers of the optimal debt ratio
Capital Structure Financial Market Income Statement Marginal tax rate =
Current MV of Equity = $552,102 Current Beta for Stock 1.05 Current EBITDA = $19,834 EBITDA/ Enterprise valu
Market Value of interest-bearing debt = $0 Current Bond Rating = Not rated Current Depreciation = $2,313 EBIT/ Enterprise value =
# of Shares Outstanding = 2905.8 Summary of Inputs Current Tax Rate = 40.00% Unlevered beta =
Debt Value of Operating leases = $2,086 Long Term Government 2.55% Current Capital Spendin $5,739
Equity Risk Premium = 5.96% Pre-tax cost of debt = 3.22% Current Interest Expense $78

RESULTS FROM ANALYSIS

Current Optimal Change
D/(D+E) Ratio = 0.38% 20.00% 19.62%
Implied Growth Rate Calculation
Beta for the Stock = 1.05 1.20 0.15 Enterprise value $515,899
Cost of Equity = 8.81% 9.73% 0.92% Current WACC = 8.78%
Rating on Debt Not rated Current FCFF = $7,086.51 ! I am ignoring working capital
After-tax cost of Debt = 1.94% 2.33% 0.38% Implied Growth R 7.31%
If this number is >your riskfree rate, I use the riskfree rate as a perpetual growth r
WACC 8.78% 8.25% -0.53%
Implied Growth Rate = 2.55%
Assumes perpeutal growth Enterprise value $515,899 $564,070 $48,172
Value/share (Perpetual $190.00 $206.58 $16.58

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 g and lt Spread Drop in EBI Current Interest coverage ratio = 225.84
AAA 8.5 100000 0.69% 0.00% Rating based upon coverage = Aaa/AAA
AA 6.5 8.499999 0.85% 0.00% Interest rate based upon coverage = 3.24%
A+ 5.5 6.499999 1.07% 0.00% Current rating for company = Not rated
A 4.25 5.499999 1.18% 0.00% Current interest rate on debt = 3.22%
A- 3 4.249999 1.33% -2.00% Drop in operating income based on current 0.00%
BBB 2.5 2.999999 1.71% -10.00%
BB 2 2.2499999 2.77% -20.00%
B+ 1.75 1.999999 4.05% -20.00%
B 1.5 1.749999 4.86% -20.00%
B- 1.25 1.499999 5.94% -25.00%
 CAPITAL STRUCTURE 18

CCC 0.8 1.249999 9.46% -40.00%

CC 0.65 0.799999 9.97% -40.00%
C 0.2 0.649999 13.09% -40.00%
D -100000 0.199999 17.44% -50.00%
 CAPITAL STRUCTURE 19

Current beta= 1.05 Current Equity= $552,102 Current Depreciation= $2,313

Current Debt= $2,086 Current EBITDA= $19,834 Current Interest rate (Compa 3.24%
Tax rate= 40.00% Current Rating= Not rated Current T.Bond rate= 2.55%
Enterprise value = $515,899 Adjusted EBITDA = $19,834
WORKSHEET FOR ESTIMATING RATINGS/INTEREST RATES
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 $55,419 $110,838 $166,256 $221,675 $277,094 $332,513 $387,932 $443,350 $498,769
Beta 1.0476 1.12 1.20 1.34 1.60 1.93 2.41 3.21 4.91 9.81
Cost of Equity 8.79% 9.21% 9.73% 10.53% 12.11% 14.03% 16.90% 21.68% 31.79% 61.04%
% Drop in EBITDA 0.00% 0.00% -2.00% -40.00% -40.00% -40.00% -40.00% -40.00% -50.00% -50.00%
EBITDA $19,834 $19,834 $19,834 $19,834 $19,834 $19,834 $19,834 $19,834 $19,834 $19,834
Depreciation $2,313 $2,313 $2,313 $2,313 $2,313 $2,313 $2,313 $2,313 $2,313 $2,313
EBIT $17,521 $17,521 $17,521 $17,521 $17,521 $17,521 $17,521 $17,521 $17,521 $17,521
Interest $0 $1,796 $4,300 $19,967 $34,670 $43,337 $52,005 $60,672 $88,626 $99,704
Taxable Income $17,521 $15,726 $13,221 ($2,446) ($17,149) ($25,816) ($34,484) ($43,151) ($71,104) ($82,183)
Tax $7,008 $6,290 $5,288 ($978) ($6,860) ($10,327) ($13,794) ($17,261) ($28,442) ($32,873)
Net Income $10,513 $9,435 $7,932 ($1,468) ($10,289) ($15,490) ($20,690) ($25,891) ($42,663) ($49,310)
(+)Deprec'n $2,313 $2,313 $2,313 $2,313 $2,313 $2,313 $2,313 $2,313 $2,313 $2,313
Funds from Op. $12,826 $11,748 $10,245 $845 ($7,976) ($13,177) ($18,377) ($23,578) ($40,350) ($46,997)

Pre-tax Int. cov ∞ 9.76 4.07 0.88 0.51 0.40 0.34 0.29 0.20 0.18
Funds/Debt ∞ 0.21 0.09 0.01 -0.04 -0.05 -0.06 -0.06 -0.09 -0.09
Likely Rating Aaa/AAA Aaa/AAA A3/A- Caa/CCC C2/C C2/C C2/C C2/C D2/D D2/D
Pre-tax cost of debt 3.24% 3.24% 3.88% 12.01% 15.64% 15.64% 15.64% 15.64% 19.99% 19.99%
Tax rate for debt (deduction constrai 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00%
Tax rate for debt tax benefits (Intere 40.00% 40.00% 40.00% 35.10% 20.21% 16.17% 13.48% 11.55% 7.91% 7.03%
Tax rate to use in after-tax cost of d 40.00% 40.00% 40.00% 35.10% 20.21% 16.17% 13.48% 11.55% 7.91% 7.03%
COST OF CAPITAL CALCULATIONS
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 $55,419 $110,838 $166,256 $221,675 $277,094 $332,513 $387,932 $443,350 $498,769
Cost of equity 8.79% 9.21% 9.73% 10.53% 12.11% 14.03% 16.90% 21.68% 31.79% 61.04%
Cost of debt 1.94% 1.94% 2.33% 7.79% 12.48% 13.11% 13.53% 13.83% 18.41% 18.58%
Cost of Capital 8.79% 8.48% 8.25% 9.71% 12.26% 13.57% 14.88% 16.19% 21.09% 22.83%
0 0 1 0 0 0 0 0 0 0
Value (perpetual growth) $514,934 $541,868 $564,070 $449,062 $331,108 $291,775 $260,795 $235,762 $173,453 $158,537
 CAPITAL STRUCTURE 20

Interest cov Interest cov RATING Interest rate Drop in

Low High EBITDA
-100000 0.199999 D2/D 19.99% -50.00%
0.2 0.649999 C2/C 15.64% -40.00%
0.65 0.799999 Ca2/CC 12.52% -40.00%
0.8 1.249999 Caa/CCC 12.01% -40.00%
1.25 1.499999 B3/B- 8.49% -25.00%
1.5 1.749999 B2/B 7.41% -20.00%
1.75 1.999999 B1/B+ 6.60% -20.00%
2 2.2499999 Ba2/BB 5.32% -20.00%
2.25 2.49999 Ba1/BB+ 4.86% -20.00%
2.5 2.999999 Baa2/BBB 4.26% -10.00%
3 4.249999 A3/A- 3.88% -2.00%
4.25 5.499999 A2/A 3.73% 0.00%
5.5 6.499999 A1/A+ 3.62% 0.00%
6.5 8.499999 Aa2/AA 3.40% 0.00%
8.5 100000 Aaa/AAA 3.24% 0.00%
 CAPITAL STRUCTURE 21

of the optimal debt ratio

40.00%
3.84%
3.40%
1.0476

oring working capital

se the riskfree rate as a perpetual growth rate.

Stock price buyback effect
Current Stock price = $190.00
# Shares outstanding before buyback 2905.80
Expected buyback price = $67.71 Enter this number

Current Debt = $2,086

Debt at Optimal = $110,838
New Debt issued = $108,752
# Shares bought back = 1606.13945
Shares outstanding after buyback = 1299.66

Enterprise value after buyback = $564,070

+ Cash 38289
- Debt ###
Equity value after buyback ###
/ Number of shares after buyback 1299.66
Value per share for remaining shares $378.19
 Enterprise Value
$600,000

$500,000

$400,000

$300,000

$200,000

$100,000

$0
Debt Ratio
Debt Ratio Beta Cost of EquityBond Rating
Interest rate on debtTax RateCost of Debt (after-tax)WACC
0% 1.0476 8.79% Aaa/AAA 3.24% 40.00% 1.94% 8.79%
10% 1.1175 9.21% Aaa/AAA 3.24% 40.00% 1.94% 8.48%
20% 1.2048 9.73% A3/A- 3.88% 40.00% 2.33% 8.25%
30% 1.3390 10.53% Caa/CCC 12.01% 35.10% 7.79% 9.71%
40% 1.6049 12.11% C2/C 15.64% 20.21% 12.48% 12.26%
50% 1.9258 14.03% C2/C 15.64% 16.17% 13.11% 13.57%
60% 2.4073 16.90% C2/C 15.64% 13.48% 13.53% 14.88%
70% 3.2097 21.68% C2/C 15.64% 11.55% 13.83% 16.19%
80% 4.9067 31.79% D2/D 19.99% 7.91% 18.41% 21.09%
90% 9.8135 61.04% D2/D 19.99% 7.03% 18.58% 22.83%

Debt Ratio $ Debt Interest Expense

Interest Coverage Ratio
Bond Rating Pre-tax cost Tax rate After-tax cost of debt
0% $0 $0 ∞ Aaa/AAA 3.24% 40.00% 1.94%
10% $55,419 $1,796 9.76 Aaa/AAA 3.24% 40.00% 1.94%
20% $110,838 $4,300 4.07 A3/A- 3.88% 40.00% 2.33%
30% $166,256 $19,967 0.88 Caa/CCC 12.01% 35.10% 7.79%
40% $221,675 $34,670 0.51 C2/C 15.64% 20.21% 12.48%
50% $277,094 $43,337 0.40 C2/C 15.64% 16.17% 13.11%
60% $332,513 $52,005 0.34 C2/C 15.64% 13.48% 13.53%
70% $387,932 $60,672 0.29 C2/C 15.64% 11.55% 13.83%
80% $443,350 $88,626 0.20 D2/D 19.99% 7.91% 18.41%
90% $498,769 $99,704 0.18 D2/D 19.99% 7.03% 18.58%
 Enterprise Value
$514,934
$541,868
$564,070
$449,062
$331,108
$291,775
$260,795
$235,762
$173,453
$158,537

After-tax cost of debt

Rating is Yes/No IBC Type of firm Earnings/Operating Measure
Aaa/AAA Yes High 1
Aa2/AA No Medium 2 EBITDA
A1/A+ Low EBIT
A2/A
A3/A-
Baa2/BBB
Ba1/BB+
Ba2/BB
B1/B+
B2/B
B3/B-
Caa/CCC
Ca2/CC
C2/C
D2/D
Not rated

Rating is Low IBC Medium High IBC

D2/D -30% -50.00% -100%
Caa/CCC -25% -40.00% -50%
Ca2/CC -25% -40.00% -50%
C2/C -25% -40.00% -50%
B3/B- -15% -25.00% -30%
B2/B -10% -20.00% -25%
B1/B+ -10% -20.00% -25%
Ba2/BB -10% -20.00% -25%
Ba1/BB+ -10% -20.00% -25%
Baa2/BBB -5% -10.00% -15%
A3/A- 0.00% -2.00% -5%
A2/A 0.00% 0.00% -2%
A1/A+ 0.00% 0.00% 0%
Aa2/AA 0.00% 0.00% 0%
Aaa/AAA 0% 0.00% 0%
Earnings/Operating Measure