COURS MARIA 3e

Bond issued 100

duration 5
yield 5%
MARKET VALU 120

Yo Y1 Y2 Y3 Y74 Y5
-120 5 5 5 5 105

YTM 0.9%
Yield to Maturity Approach = Cost of debt Kd
BIG COMPANY

coupon 8% = YTM because just issued then it changes according to market value
marginal tax rate 40%
Net Cost of Capital 4.8% = coupon * (1 - taxes)

Cost of K

CASE A
ISSUE BOND 100
DURATION 4
COUPON 4% 4 €
MARKET TREND 102.85

Yo Y1 Y2 Y3 Y4
-102.85 4 € 4 € 4 € 104 €
YTM 3.2%

CASE B
ISSUE BOND 100
DURATION 4
COUPON 4% 4 €
MARKET TREND 90

Yo Y1 Y2 Y3 Y4
-90 4 € 4 € 4 € 104 €
YTM 6.9%
s according to market value
CASE A
sell stock 21
divi expected 1
ROE 12%
PAY OUT 40%

g = (1- payout)*ROE 7.2%

Ke 12%

CASE B
sell stock 60
dividend n-10 1.5
now current divi 4
D1 4.41

year 1 2 3 4 5
1.5 1.65 1.83 2.01 2.22

formula = 1,5(1+g)^10 = 4

G 10.3%

Ke 17.66%
 6 7 8 9 10 11
2.45 2.70 2.98 3.29 3.63 4.00
K structure
Debt 40%
Equity 60%

bonds
face value 1,000 €
Coupon rate 10% semiannual 200 ANNUAL
maturity 20 years

sell 849.54 €
YTM 12% Yield to Maturity

beta 1.2 β
risk free rate 10%
market risk premium 5%

constant growth firm 8%

sells / share 27 €
dividend 2 €

marginal tax rate 40%

COMPANY AFTER TAX COST OF DEBT

= (1-t) * (d/d+e * kd)

t 40%
d/d+e 40%
kd = YTM 24%

ANSWER 5.66%

Yo Y1 Y2 Y3 Y4
-849.54 € 200 200 200 200
YTM 24%

CAPM

risk free rate 10%

premium risk 5%
beta 1.2

Ke 16.00%

DIVIDEND DISCOUNT MODEL

DIVIDEND 2 €
PRICE 27 €
GROWTH 8%

Ke 16.00%
WACC

(1-t) 60%

d/d+e 40%
kd 24%

e/d+e 60%
ke 16%

WACC 15.26%
Y5 Y6 Y7 Y8 Y9 Y10 Y11
200 200 200 200 200 200 200
Y12 Y13 Y14 Y15 Y16 Y17 Y18
200 200 200 200 200 200 200
Y19 Y20
200 1,200 €
Common shares 1.2
β 2.2
Tax rate 0.3 Cost of debt = yield to maturity
(1-t) 0.7
13.65
Share price 10
Kd
Ke

New capital rais 7.5

Debt 12
Weight of Debts D/(D+E)
Equity
Weight of EquityE/(D+E)
to maturity