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Presented
by:
DJ Douglas
Chasiti Dixon
Case #33
8/5/12
History
8/5/12
Facilitating success:
Increase advertising
Increase leverage using debt financing
8/5/12
Effect of Leverage on
ROE
Interest Rate
Tax Rate
Earnings before income taxes and
interest
Interest Expense
Earnings before taxes
Income taxes
Net income
Book value:
Debt
Equity
Total capital
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Debt/Total Capital
Actual 10%
20% 30%
6.16% 6.16% 6.16% 6.16%
32.50
32.50
32.50%32.50%
%
%
30,054 30,054 30,054 30,054
0 1,391 2,783 4,174
30,054 28,663 27,271 25,880
9,755 9,303 8,852 8,400
20,299 19,359 18,419 17,480
10.19 11.05
8.99% 9.52%
%
%
= bL = bU[1 + (1 T)D/E]
10%
bL = bU [ 1 + ( 1 - 32.5%) 22,589 /
628,516]
bL = 0.85 [ 1 + (0.675) 0.0359]
bL = 0.85 [ 1 + 0.0242]
bL = 0.85 [1.0242]
bL= 0.87057
20%
bL = bU [ 1 + ( 1 - 32.5%) 45,178 /
613,259]
bL = 0.85 [ 1 + (.675) 0.0737]
bL = 0.85 [ 1 +0.0497]
bL = 0.85 [1.0497]
bL= 0.892245
30%
bL = bU [ 1 + ( 1 - 32.5%) 67,766 / 598,002]
bL = 0.85 [ 1 + (0.675) 0.1133]
bL = 0.85 [ 1 + 0.0765]
bL = 0.85 [1.0765]
bL= 0.915025
8/5/12
WACC
Formula:
(kd) (1-t)(%debt-financed)
kd=6.16%
(ke)(%equity-financed)
WACC:
kd
10%
20%
30%
6.16%
6.16%
6.16%
tax shield
0.6750
0.6750
0.6750
debt financed
0.0347
0.0686
0.1018
ke
0.095529
0.096612
0.0977513
equity financed
0.9653
0.9314
0.8982
ovr kd
0.001443
0.002852
0.0042328
ovr ke
0.092214
0.089985
0.0878002
WACC
0.093656 0.092837
0.092033
9.20%
9.37%
9.28%
Re = Rf + B[Rm - Rf]
8/5/12
0.095529RE
Actual
Debt/Total Capital
10%
20%
30%
Book value:
Debt
Equity
Total capital
22,589
45,178
67,766
225,888
203,299
180,710
158,122
225,888
225,888
225,888
225,888
Market value:
Debt
Equity
Total capital
22,589
45,178
67,766
643,773
628,516
613,259
598,002
643,773
651,105
658,437
665,768
22.10 $
21.58 $
21.05 $
20.53
7.75 $
6.98 $
6.20 $
5.43
14.35 $
14.60 $
14.85 $
15.10
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8/5/12
Debt/Total Capital
10%
20%
30%
Book value:
Debt
Equity
Total capital
0
225,888
225,888
22,589
203,299
225,888
45,178
180,710
225,888
67,766
158,122
225,888
Market value:
Debt
Equity
Total capital
0
643,773
643,773
22,589
628,516
651,105
45,178
613,259
658,437
67,766
598,002
665,768
SharePrice
MV- #of Shares Outstanding
$22.10
29,130
$22.10
28,440
$22.10
27,749
$22.10
27,059
Treasury stockRepurchases
Number of Shares Oustanding- Actual
Stock Price per Share
EPS
ROE
Number of Shares Outstanding Less Repurchase1M X $22.10= $22,100,000
Stock Price per Share
EPS
ROE
Number of Shares Outstanding Less Repurchase
to recover 10% decline= 2.65M * $22.10=
$58,565,000
Stock Price per Share
EPS
ROE
Number of Shares Outstanding to Meet Industry
Standards- 9.13 M X $22.10 = $201,773,000
Stock Price per Share
EPS
ROE
8/5/12
29,130,000
29,130,000
$
$
22.10
21.58
$
$
0.70
0.66
8.99%
9.52%
29,130,000 29,130,000
$
$
21.05
20.53
$
$
0.63
0.60
10.19%
11.05%
28,130,000
28,130,000 28,130,000 28,130,000
$
22.89
$
22.34 $
21.80 $
21.26
$
$
$
$
0.72
0.69
0.65
0.62
9.25%
9.84%
26,480,000 26,480,000
$
$
24.31
23.74
$
$
0.77
0.73
9.83%
10.52%
10.57%
11.53%
26,480,000 26,480,000
$
23.16
$
22.58
$
$
0.70
0.66
11.41%
12.60%
20,000,000
20,000,000 20,000,000 20,000,000
32.18865
31.4258
30.66295
29.9001
$
$
$
$
1.01
0.97
0.92
0.87
13.01%
14.51%
16.62%
19.81%
CPK No Longer
Publically Traded
$22.10
Investor's # of
Shares
$22.10
8/5/12
# of Shares
Outstanding
1,000
Investor's # of
Shares
1,000
29,130,000
# of Shares
Outstanding
28,130,000
EPS
0.70
EPS
0.72
Increased
wealth
to
shareholders
due to stock
repurchase
without
double
taxation.
Recommended Capital
Structure Policy
Repurchase 2.65 million shares of stock
at a cost of $58,565,000
8/5/12
Questions?
8/5/12