Degree of operating leverage = % change in operating profits/% change in salesLevered Beta = Unlevered Beta * (1+(1-marginal tax rate) * (Debt/Equity))2ndapproach – Levered Beta = Unlevered Beta*(1+(1-t) * (D/E)) – Beta of debt * (1-t)*(D/E)Unlevered Beta = Pure Business beta * (1 + (Fixed Costs/Variable Costs))Std error of bottom up beta = average std error across beta/sqrt(number of firms in sample)Use value for business mix not sales or EBITDA, Use Industry avg EV/Sales to get value estimateNet debt = debt-cash, cost of equity with net debt is much lower, cost of capital is the sameEstimating cost of debt – ytm on firm bonds, look up firms rating and estimate a default spread based on the ratings, rating can be estimated from Interest Coverage ratio, EBIT/Interest Exp.
Cost of debt = Rf + lamda*(country default spread) + Company default spreadCOC in other currency = (1+ COC in USD) *(1+inflation rt other currency)/ (1+inflation rt US) – 1PV(Annuity) = Coupon * (1-(1/((1+r)^n)))/r + Principal Payment/(1+r)^nDividend yield on index price, Predict next year’s dividend, Next year’s dividend/(r-g)Cost of preferred stock = preferred dividend yieldConvertible bond, calculate debt PV of payments and subtract from mkt val to get eqty portionCash flows to equity – net income, cash flows to firm – NOPAT (EBIT*(1-tax))NOPAT – Capex + Depreciation – change in working capital = FCFFDebt value of op. leases = PV of op. leases at pre-tax cost of debt1.Adjusted Operating earnings = operating earnings + op. lease exp. – est. dep. On leased asset