Calculations for the Optimal Capital Structure (OCS) by using the Hamada equation. need to find the new
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Calculations for the Optimal Capital Structure (OCS) by using the Hamada equation. need to find the new unlevered beta and the new cost of equity from CAPM and then have to calculate the new WACC , provide excel sheet
Input Data | |||
Tax Rate | 16% | 5-Year Effective Tax Rate | |
Debt | 110,087,000,000 | From Annual Report (Millions) | |
Number of Common Shares | 15,943,425,000 | From Annual Report | |
Market Price per share | 152.64 | From Market Watch Website | |
Total Market Value of Equity | 2,433,604,392,000 | ||
Total Market Value | 2,543,691,392,000 | ||
Debt Proportion | 4.33% | ||
Equity Proportion | 95.67% | ||
Cost of Capital | |||
Beta (b) | 1.293 | Beta From 5 Years Data | |
Risk-Free Rate | 3.88% | Data From 30-Year Treasury Data (Resource center, n.d.). | |
Market Risk Premium | 5.60% | Data From the Statista.com website | |
Cost of Equity (CAPM) CAPM=Rf+Beta*Rm | 11.12% | ||
Cost of Equity (Dividend Growth Model) | |||
2023 Dividends | 0.92 | From Yahoo Finance | |
Share Price(17th Feb 2023) | 152.64 | From Market Watch Website | |
Cost of Equity (Dividend Growth Model) | |||
Dividends | 0.92 | ||
Price | 152.64 | ||
Growth | 11.12% | ||
Rate of Return | 11.73% | ||
Cost of Debt | |||
Interest expense | 2,800,000,000 | ||
Total Debt | 110,087,000,000 | ||
Cost of Debt | 2.54% | ||
WACC | Proportion | Costs | |
Debt | 4.33% | 9.38% | 0.41% |
Equity | 95.67% | 2.54% | 2.43% |
WACC | 2.84% |
Hamada's Equation: bL = bU*[1 + (1 - T) *D/E] bU = bL/ [1 + (1 - T) *D/E] bU = 1.0777 bU is unlevered beta T is Tax Rate D/E is Debt to Equity Ratio bL is levered beta
Calculating CAPM using the new beta to compute the Cost of Equity, assuming same rates as in the previous WACC RE=RF+ (RMRF)=RF+ RPM
new RE= new beta = new WACC = (Cost of Equity * Weight of equity) + (Cost of debt * weight of debt) * (1-Tax Rate)
Related Book For
Fundamentals of Financial Management
ISBN: 978-0324664553
Concise 6th Edition
Authors: Eugene F. Brigham, Joel F. Houston
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