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PRELIMINARY STUFF AND INPUTS
Objective
This spreadsheet allows you to compute the optimal capital structure for a 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
Enter the most updated numbers you have for each (even if they are 12month 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.
interest expenses
If long term interest expenses are not broken out, apportion the total interest expenses
based upon how much long term debt the firm has, relative to total interest bearing debt.
From the statement of cash flows, also enter the capital spending from the recent period.
P.S: For financial service firms, both depreciation and capital spending are likely to be
small numbers.
Balance Sheet
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 longterm government bond rate, the 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 estimate it. Otherwise, use the effective tax rate.
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
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 Summer '10
 Aswath

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