Convertible Preferred Preferred

Market Value 105.00

Par Value 100.00 100.00
Dividend Rate 0.06 0.09

Find the value attributable to preferred and common equity (the conversion chenes)

Difference = 105 - 100 = 5 can only be used if the stocks have the same characteristics (

First: Find the value of preferred.

Value = Dividend / Cost of Preferred Stock
Value = (100x6%)/9% = 66.67

Second: Find the value of equity portion.

Value = Market Value - Value of Preferred
Value = 105 - 66.67 = 38.33
the conversion chenes)

ve the same characteristics (as of the given, they don't have the same rate)
Find = Debt Ratio = Debt/Capital
1,000,000 shares outstanding
50.00 per share

25,000,000.00 debt
market interest rate 8%

20,000 convertible bonds Value of Bonds

10 year-bond n = 10x2
Face Value 1,000.00 I = 8%/2
Market Value 1,100.00 PMT = 20,000 x 1000 x 5%/2
Coupon Rate 5% FV = 20,000 x 1000
PV =
Assumption: 1000 face value , semi-annual

Total Equity = 1,000,000 x 50 + 6,077,097.9 50,000,000.00

Total Debt = 25,000,000 + 15,922,902.1 25,000,000.00
Total Capital

Debt Ratio = Debt/Capital 42.1885589%

 Value Attributable to Equity
20 Value = Market Value of Convertible Bonds - Value
4% Value = (20,000 x 1100) - 15,922,902.1
0 x 1000 x 5%/2 500,000.00
20,000,000.00
15,922,902.10

6,077,097.90 56,077,097.90
15,922,902.10 40,922,902.10
97,000,000.00
ertible Bonds - Value of Ordinary Bonds
922,902.1 6,077,097.90
Reminder: In getting ratios (weights) , market values are always preferred than book valu

A company has 2 shares outstanding

Class A Class B
No. of Shares 50,000 100,000
Voting per share 2.00 1.00
Market Value 100.00 90.00

Recently Issued Debt

5,000,000.00 (if it is recently issued, it means that book value is almost the

Total Debt 5,000,000.00

Total Equity 5,000,000.00

9,000,000.00 14,000,000.00
Total Capital 19,000,000.00

Debt Ratio 26.31579%

preferred than book values

t book value is almost the same with the market value of the debt)
Floatation Cost cost incurred because of additional investment (could be equity/debt)
deducted from the price
only relevant to first year ( sometimes? most of the times?), babalik k
could be a percentage of the price or an actual amount

Po = d1/r-g (1-F) Po = D1 / (r - g)

the r will be recomputed, because the price will go down, expect that the rate will be highe

beta 1.2 floatation cost 5%

rfr 6.5
mrp 6

cost of equity 13.7%

Find = New Cost of Equity

Pick any number for trial
Original Price 100
New Price = 100(1-.05) 95

New COE = (100/95) x 13.7 14.42105%

(could be equity/debt)

f the times?), babalik ka din sa normal computation

t the rate will be higher/greater

Capital Budgeting

Initial Investment 60,000.00

Expected CF each year for 10 years 10,000.00
Tax rate 40%
Cost of Debt 5%
d1 1.00
P0 20.00
g 5%

Weights
Debt 40%
Equity 60%

Cost of equity 10%

Cost of debt 5%
After-tax cod 3%
WACC 7.2%

Initial Investment 60,000.00

Debt 24,000.00
Equity 36,000.00 with 5%
r=? =(1/20)+5%
10%

NPV = ? 9,591.06 (original value)

CF
0 (60,000.00)
1 10,000.00
2 10,000.00
3 10,000.00
4 10,000.00
5 10,000.00
6 10,000.00
7 10,000.00
8 10,000.00
9 10,000.00
10 10,000.00

floatation cost which is equal to 1,800.00 and is added to cost

NPV = ? 7,791.06 (new value, lesser value)

CF new investment @ period 0
0 (60,000.00) +1800 (61,800.00)
1 10,000.00
2 10,000.00
3 10,000.00
4 10,000.00
5 10,000.00
6 10,000.00
7 10,000.00
 8 10,000.00
9 10,000.00
10 10,000.00
Venture Capital

Venture Chenes Company searches for company that has no proven track record but have

A private held company

Firm Value 80,000,000.00 (w/ capital constraints)

A venture company will invest 20,000,000.00 in exchange for

Firm Value will become 120,000,000.00

Accept or not? Yes. Additional P 4,000,000

Original Value 80,000,000.00

Share in New Value 84,000,000.00

Breakeven 0.6666666667 or 80/120 or 2/3

Another way to raise capital

Go public (in this case, the company will issue its shares, w/ lesser price to be sellable)
Selling Price 10.00 under by 20%
under by 20% 80%

Original Price 12.50

issued shares price total value

Proceeds 2,000,000 10.00 20,000,000.00
Original Value 2,000,000 12.50 25,000,000.00

Amount Attributable to New Shareholders 25,000,000.00

Amount Attributable to Old Shareholders 95,000,000.00

Outstanding Shares (Old) 7,600,000

Outstanding Shares (New) 2,000,000
Total Outstanding Shares 9,600,000
track record but have potentials, and they will invest hoping for a great return

l constraints)

30% ownership

ice to be sellable)
Private
Electronics Chenes

No debt outstanding
No earnings now but expecting 15,000,000 each year in

4 years from now, the company will go public

Average price earnings 50

Value = 15M x 50 750,000,000

Venture Capitalist 35% per annum

Value/Share of the Venture Chenes

=750,000,000 / 1.35^4 225,801,170.78

In this case: Magiinvest yung venture capitalist ng 75,000,000.00

At a minimum (di ko maalala ang kasunod), what % of the firm value?

High 33.215063%
Low 24.933414%
4 years
VL = VU + TR(D) - Bankruptcy Cost

An unlevered company
EBIT
Tax Rate
Market Value of the Firm

Unlevered Beta
Rfr
MRP

Management will issue debt and will use it to buy existing stocks
Default free interest rate

PV of any bankruptcy cost

Level of Debt Probability of Bankruptcy Incremental Debt

2,500,000.00 0% 2,500,000.00
5,000,000.00 8% 2,500,000.00
7,500,000.00 20.50% 2,500,000.00
8,000,000.00 30% 500,000.00
9,000,000.00 45% 1,000,000.00
10,000,000.00 52.50% 1,000,000.00
12,500,000.00 70% 2,500,000.00
 2,000,000.00 per year
40%
12,000,000.00 Equity 12,000,000.00
Debt 0.00
1
9%
6%

12%

8,000,000.00

ental Debt Incremental Tax Benefit Incremental Cost of Bankruptcy

1,000,000.00 0.00
1,000,000.00 640000.00
1,000,000.00 1000000.00
200,000.00 760000.00
400,000.00 1200000.00
400,000.00 600000.00
1,000,000.00 1400000.00
Total Firm Value
13,000,000.00
13,360,000.00
13,360,000.00
12,800,000.00
12,000,000.00
11,800,000.00
11,400,000.00
Outstanding Shares 10,000,000.00
Market Value 50.00
Total Value 500,000,000.00

Debt (market value) 200,000,000.00

current rating BBB 11% 11

will be B 12.50% 12.5

if the company will borrow 100,000,000.00

Beta 1.5 (levered) coe

rfr 0 8 wacc
MRP 5.50% 5.5
Marginal Tax Rate 46% (base sa ginawa ni s
old wacc
SHOULD THE CORPO BORROW? new wacc

Unlevered Beta 1.233552632

change in firm's valu
new levered beta 1.633223684

new coe 16.98

 new
16.250000000 coe 16.98273026
13.304285714 wacc 13.1454564145

base sa ginawa ni sir, rounded values yung ginamit nya)

13.3
13.15
so may change na .15, 15 basis points according to sir

hange in firm's value =0.15/13.15

0.01140684
700000000
change 7984790.87
divide by
no. of
outstanding
shares 10000000
0.79847909 ---> .8 na according kay sir so 50.8 na yung price