Beruflich Dokumente
Kultur Dokumente
57
Converting leases to debt
The debt value of leases is the present
value of the lease payments, at a rate that
reflects their risk.
In general, this rate will be close to or equal
to the rate at which the company can borrow,
i.e., pre-tax cost of debt.
Capital leases are included in the balance
sheet, operating leases are not.
58
Accounting for convertible bonds
A convertible bond is a bond that can be converted into equity at
the option of the bondholder.
To incorporate a firms outstanding convertible bond issues into
our cost of capital calculations, we separate the bond
into 2 distinct components:
Straight debt, whose value is
Conversion option = Current bond price straight debt value
n
d
BTr
incipal
) 1 (
Pr
BTr
) BTr + (1
1
- 1
C =
d
n
d
+
+
(
(
(
(
59
Accounting for convertible bonds
The straight debt component is included in debt.
The conversion option component is included in
equity.
60
Cost of Capital
The weighted average cost of capital (or firm hurdle rate) is then
just the weighted average of the individual sources of capital
*r
d
represents an after-tax cost of debt
Divisional costs of capital may be calculated if firms have distinct
major divisions of operation
|
.
|
\
|
+ +
+
|
.
|
\
|
+ +
+
|
.
|
\
|
+ +
=
PS E D
PS
r
PS E D
D
r
PS E D
E
r WACC
ps d e
61
Choosing a Hurdle Rate
Either the cost of equity or the cost of capital can be used
as a hurdle rate, depending upon whether the returns
measured are to equity investors or to all claimholders on
the firm (capital)
If returns are measured to equity investors, the
appropriate hurdle rate is the cost of equity.
If returns are measured to capital (or the firm), the
appropriate hurdle rate is the cost of capital.
62
Readings
Text, Ch. 4
We will not be covering risk-free rate for
emerging markets or historical premiums in
other markets.