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Optimal Capital Structure with Business Disruption Costs

February 18, 2012 by Hans Tallis 2 Comments

In an earlier post we showed that, for a tax-paying firm, WACC is always a declining function of leverage.  If firm value is an inverse function of WACC, this suggests funding operations with 100% debt.

In fact we observe that firm value is concave in leverage and appears to peak when there is some equity in the capital structure.  We’re forced to conclude that firm value isn’t solely a function of WACC, but instead varies in a more complicated fashion with leverage.  In this post we’ll review one theory that explains this, and which can guide us in divining an “optimal” capital structure. [Read more…]

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

The Economic Irrelevance of Distribution Form

January 31, 2012 by Hans Tallis 2 Comments

A recent article in the Economist suggests that managers with exposure to their firm’s share price would benefit by reducing dividends and instead buying back shares.  From a strictly economic point of view, we don’t see the difference. [Read more…]

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Filed Under: Capital Return Tagged With: capital structure, download

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