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Calculate WACC With Debt Beta

December 20, 2011 by Hans Tallis 20 Comments

Calculating WACC correctly should preclude its use to optimize capital structure.  In this post we’ll see why.

Traditional WACC Calculation

There was a time when WACC was used to find an “optimal capital structure”, which meant a debt/equity ratio that minimized the cost of capital.  Charts like this were part of the argument:

[Read more…]

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Filed Under: Debt Capacity Tagged With: capital structure, download, recipe

Get Company Fundamental Data

December 15, 2011 by Hans Tallis 1 Comment

There are a variety of online sources of company fundamental data (historical financial filings).  The easiest and most reliable are the paid services, such as Compustat, Capital IQ, or Bloomberg.

In this recipe we show how to use Yahoo Finance’s “Stock Market Functions” Excel add-in, which consolidates references to a variety of company and market data from several online sources. [Read more…]

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Filed Under: Sustainable Company Modeling Tagged With: download, recipe

Consider Asset Duration Matching

December 15, 2011 by Hans Tallis Leave a Comment

Separately from overall debt capacity, debt structure reflects specific choice of capital structure instruments.  We address the goal of maximizing shareholder value in two ways:

  • In good times, minimize the expected funding costs of the firm
  • In bad times, minimize the costs of financial distress

In this post we consider duration matching, which clients occasionally propose. [Read more…]

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Filed Under: Debt Capacity Tagged With: capital structure, recipe

Determine Analysis Type and Information Needs

December 8, 2011 by Hans Tallis Leave a Comment

Corporate Finance Analysis

Better analysis requires more information.  In this recipe you will learn

  • What defines quantitative corporate finance analysis
  • The spectrum of analysis types
  • The data (company fundamental or market) required for each type
  • Trade-offs

The Availability of Data

Information is difficult and costly to acquire.  This issue is at the forefront of quantitative analysis, which elevates the reliance on data in decision making.  The following diagram lays out, left to right, the use of increasing amounts of information: [Read more…]

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Filed Under: Quantitative Analysis Tagged With: capital structure, recipe

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