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capstruenhanced - Objective Before you start Inputs Units...

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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 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. Earnings before long term interest exp & depr = Net Income + taxes paid + long term 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 long-term 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 Corporate Finance: Theory and Practice, Chapter 18 Applied Corporate Finance: Chapter 8 The key income input is the earnings before long term interest expenses and depreciation .
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