Chapter Prospective Analysis: Valuation Implementation Discussion Questions 1. How would the forecasts in Table 8-2 change if TJX were to maintain a sales growth rate of 10 percent per year from 2011 to 2020 (and all the other assumptions are kept unchanged)? Sales growth rate NOPAT margin WC to sales LT assets to sales Debt ratio After tax cost of debt 2011 10.0% 7.9% 0.6% 33.4% 57.5% 2.73% 2012 10.0% 7.5% 1.0% 34.0% 57.5% 2.73% 2013 10.0% 7.1% 1.0% 34.3% 57.5% 2.73% 2014 10.0% 6.7% 1.0% 34.5% 57.5% 2.73% 2015 10.0% 6.3% 1.0% 34.8% 57.5% 2.73% 2016 10.0% 5.9% 1.0% 35.0% 57.5% 2.73% 2017 10.0% 5.5% 1.0% 35.3% 57.5% 2.73% 2018 10.0% 5.0% 1.0% 35.5% 57.5% 2.73% 2019 10.0% 4.5% 1.0% 35.8% 57.5% 2.73% 2020 10.0% 4.0% 1.0% 36.0% 57.5% 2.73% 24,1 36 1,9 07 24 1,7 83 26,5 50 1,9 91 46 1,8 46 29,2 05 2,0 74 61 1,9 12 32,1 26 2,1 52 79 1,9 74 35,3 38 2,2 26 98 2,0 28 38,8 72 2,2 93 19 2,0 74 42,7 59 2,3 52 43 2,1 09 47,0 35 2,3 52 69 2,0 82 51,7 39 2,3 28 98 2,0 30 56,9 12 2,2 77 30 1,9 46 1,78 1,84 1,91 1,97 2,02 2,07 2,10 2,08 2,03 1,946 Income Statement Sales Net operating profit after tax - Net interest expense after tax = Net Income - Preferred dividends = Net income to common © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 2 Instructor’s Manual © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Chapter Prospective Analysis: Valuation Implementation 3 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 144 7,7 54 7,89 266 9, 027 9,2 93 292 10, 003 10,2 95 321 11,0 83 11,40 353 12, 280 12,6 33 389 13, 605 13,9 94 428 15, 073 15,5 00 470 16, 697 17,1 68 517 18, 497 19,0 14 569 20, 488 21,0 58 4,5 41 5, 343 5, 919 6, 557 7, 264 8, 046 8, 912 9, 871 10 ,932 12 ,107 3,3 57 3, 950 4, 376 4, 847 5, 370 5, 948 6, 588 7,2 97 8,0 82 8,9 50 Beginning Balance Sheet Beg Net working capital + Beg Net long-term assets = Net operating assets Net debt + Preferred stock + Common stock = Net capital Ratios Operating return on assets Return on equity Book value of assets growth Book value of equity growth Net operating asset turnover 7,899 24.1% 53.1% 23.7% 16.2% 3.1 9,293 21.4% 46.7% 17.7% 17.7% 2.9 10,295 20.1% 43.7% 10.8% 10.8% 2.8 11,405 18.9% 40.7% 10.8% 10.8% 2.8 12,633 13,994 15,500 17,168 19,014 21,058 17.6% 37.8% 10.8% 10.8% 2.8 16.4% 34.9% 10.8% 10.8% 2.8 15.2% 32.0% 10.8% 10.8% 2.8 13.7% 28.5% 10.8% 10.8% 2.7 12.2% 25.1% 10.8% 10.8% 2.7 10.9% 21.7% 10.8% 10.8% 2.7 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 4 Instructor’s Manual 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1,7 83 (12 1) (1, 273) 80 1, 190 1,8 46 1,9 12 1,9 74 2,0 28 2,0 74 2,1 09 2,0 82 2,0 30 1,946 (27) (976 ) 57 1, 420 (29) (1,0 81) 63 1, 440 (32) (1,1 97) 70 1, 451 (35) (1,3 25) 78 1, 450 (39) (1,4 67) 86 1, 434 (43) (1,6 25) 95 1, 400 (47) (1,7 99) 1, 061 1, 298 (52) (1,9 92) 1, 175 1, 161 1,9 91 2,0 74 2,1 52 2,2 26 2,2 93 2,3 52 2,3 52 2,3 28 (27) (976 ) 98 (29) (1,0 81) 96 (32) (1,1 97) 92 (35) (1,3 25) 86 (39) (1,4 67) 78 (43) (1,6 25) 68 (47) (1,7 99) 50 (52) (1,9 92) 28 Cash flows Net Income - Change in net working capital - Change in net long-term assets + Change in net debt = Free cash flow to equity Net operating profit after tax - Change in net working capital - Change in net long-term assets = Free cash flow to capital 1,9 07 (12 1) (1, 273) 51 Note: 2021 input values same as 2020 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part (57) (2,049) 1,211 1,051 2,277 (57) (2,049) 171 Chapter Prospective Analysis: Valuation Implementation 5 Recalculate the forecasts in Table 8-2 assuming that the NOPAT profit margin is held steady for the first five years of the forecast and then declines by 0.1 percentage points per year thereafter (keeping all the other assumptions unchanged) Sales growth rate NOPAT margin WC to sales LT assets to sales Debt ratio After tax cost of debt 2011 5.7% 7.9% 0.6% 33.4% 57.5% 2.73% 2012 6.6% 7.9% 1.0% 34.0% 57.5% 2.73% 2013 7.1% 7.9% 1.0% 34.3% 57.5% 2.73% 2014 6.9% 7.9% 1.0% 34.5% 57.5% 2.73% 2015 6.7% 7.9% 1.0% 34.8% 57.5% 2.73% 2016 6.5% 7.8% 1.0% 35.0% 57.5% 2.73% 2017 6.3% 7.7% 1.0% 35.3% 57.5% 2.73% 2018 6.1% 7.6% 1.0% 35.5% 57.5% 2.73% 2019 5.9% 7.5% 1.0% 35.8% 57.5% 2.73% 2020 5.7% 7.4% 1.0% 36.0% 57.5% 2.73% 23,1 93 1,8 32 12 1,7 08 24,7 24 1,9 53 36 1,8 17 26,4 79 2,0 92 14 1,9 45 28,3 06 2,2 36 58 2,0 79 30,2 03 2,3 86 16 2,2 17 32,1 66 2,5 09 18 2,3 27 34,1 92 2,6 33 94 2,4 38 36,2 78 2,7 57 20 2,5 49 38,4 18 2,8 81 22 2,6 60 40,6 08 3,0 05 23 2,7 69 1,7 08 1,8 17 1,9 45 2,0 79 2,2 17 2,3 27 2,4 38 2,5 49 2,6 60 2,7 69 Income Statement Sales Net operating profit after tax - Net interest expense after tax = Net Income - Preferred dividends = Net income to common © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 6 Instructor’s Manual 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 14 7,7 54 7,89 247 8,4 06 8,65 265 9,06 9,334 283 9,76 10,04 302 10,4 95 10,79 322 11,2 58 11,58 342 12,0 53 12,39 363 12,8 79 13,24 384 13,7 35 14,11 406 14,6 19 15,02 4,5 41 4,9 75 5,3 67 5,7 78 6,2 08 6,6 58 7,1 26 7,6 13 8,1 18 8,6 39 3,3 57 7,89 3,6 78 8,65 3,9 67 4,2 71 10,04 4,5 89 10,79 4,9 22 11,58 5,2 68 12,39 5,62 13,24 6,00 14,11 6,38 15,02 Beginning Balance Sheet Beg Net working capital + Beg Net long-term assets = Net operating assets Net debt + Preferred stock + Common stock = Net capital Ratios Operating return on assets Return on equity Book value of assets growth Book value of equity growth Net operating asset turnover 23.2% 50.9% 23.7% 16.2% 2.9 22.6% 49.4% 9.6% 9.6% 2.9 9,334 22.4% 49.0% 7.9% 7.9% 2.8 22.3% 48.7% 7.7% 7.7% 2.8 22.1% 48.3% 7.5% 7.5% 2.8 21.7% 47.3% 7.2% 7.2% 2.8 21.2% 46.3% 7.0% 7.0% 2.8 20.8% 45.3% 6.8% 6.8% 2.7 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 20.4% 44.3% 6.6% 6.6% 2.7 20.0% 43.4% 6.4% 6.4% 2.7 Chapter Prospective Analysis: Valuation Implementation 7 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1,70 (103 ) (652 ) 43 1,3 88 1,81 ( 18) (663 ) 39 1,5 28 1,94 (18) 2,07 ( 19) 2,21 ( 20) 2,32 ( 20) 2,43 ( 21) 2,54 ( 21) 2,66 ( 22) 2,76 ( 23) (697) 41 1,6 42 (730) 43 1,7 60 (763) 45 1,88 (795) 46 1,98 (826) 48 2,07 (856) 50 2,17 (884) 52 2,27 (833) 49 2,40 1,83 (103 ) (652 ) 1,0 77 1,95 ( 18) (663 ) 1,2 73 2,09 (18) 2,23 ( 19) 2,38 ( 20) 2,50 ( 20) 2,63 ( 21) 2,75 ( 21) 2,88 ( 22) 3,00 ( 23) (697) 1,3 77 (730) 1,4 87 (763) 1,6 04 (795) 1,6 94 (826) 1,7 86 (856) 1,8 80 (884) 1,9 75 (833) 2,1 49 Cash flows - Net Income Change in net working capital Change in net long-term assets + Change in net debt = Free cash flow to equity - Net operating profit after tax Change in net working capital Change in net long-term assets = Free cash flow to capital Note: 2021 input values same as 2020 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 8 Instructor’s Manual 3. Recalculate the forecasts in Tables 8-2 assuming that the ratio of net operating working capital to sales is percent, and the ratio of net longterm assets to sales holds steady at 33.4 percent for all the years from fiscal 2011 to fiscal 2020 Keep all the other assumptions unchanged Sales growth rate NOPAT margin WC to sales LT assets to sales Debt ratio After tax cost of debt 2011 5.7% 7.9% 0.6% 33.4% 57.5% 2.73% 2012 6.6% 7.5% 3.0% 33.4% 57.5% 2.73% 2013 7.1% 7.1% 3.0% 33.4% 57.5% 2.73% 2014 6.9% 6.7% 3.0% 33.4% 57.5% 2.73% 2015 6.7% 6.3% 3.0% 33.4% 57.5% 2.73% 2016 6.5% 5.9% 3.0% 33.4% 57.5% 2.73% 2017 6.3% 5.5% 3.0% 33.4% 57.5% 2.73% 2018 6.1% 5.0% 3.0% 33.4% 57.5% 2.73% 2019 5.9% 4.5% 3.0% 33.4% 57.5% 2.73% 2020 5.7% 4.0% 3.0% 33.4% 57.5% 2.73% 23,1 93 1,8 32 24 1,7 08 24,7 24 1,8 54 41 1,7 13 26,4 79 1,8 80 51 1,7 29 28,3 06 1,8 97 62 1,7 35 30,2 03 1,9 03 72 1,7 30 32,1 66 1,8 99 84 1,7 14 34,1 92 1,8 81 95 1,6 85 36,2 78 1,8 14 07 1,6 07 38,4 18 1,7 29 19 1,5 09 40,6 08 1,6 24 32 1,3 92 1,7 08 1,7 13 1,7 29 1,7 35 1,7 30 1,7 14 1,6 85 1,6 07 1,5 09 1,3 92 Income Statement Sales Net operating profit after tax - Net interest expense after tax = Net Income - Preferred dividends = Net income to common © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Chapter Prospective Analysis: Valuation Implementation 9 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 849 965 10,74 1,02 11,42 1,08 12,11 1,15 12,83 1,21 13,56 Beginning Balance Sheet Beg Net working capital + Beg Net long-term assets = Net operating assets Net debt + Preferred stock + Common stock = Net capital Ratios Operating return on assets Return on equity Book value of assets growth Book value of equity growth Net operating asset turnover 144 7,7 54 7,89 742 8,25 794 8,84 9,454 906 10,08 8,999 9,638 10,303 10,994 11,708 12,446 13,205 13,984 14,781 4,5 41 5,1 74 5,5 42 5,92 6,32 6,73 7,15 7,59 8,04 8,49 3,3 57 7,89 3,8 25 4,0 97 4,37 - - - - - - 4,673 4,976 5,290 5,613 5,944 6,283 8,999 9,638 10,303 10,994 11,708 12,446 13,205 13,984 14,781 23.2% 50.9% 23.7% 16.2% 2.9 20.6% 44.8% 13.9% 13.9% 2.8 19.5% 42.2% 7.1% 7.1% 2.8 18.4% 39.6% 6.9% 6.9% 2.8 17.3% 37.0% 6.7% 6.7% 2.8 16.2% 34.4% 6.5% 6.5% 2.8 15.1% 31.9% 6.3% 6.3% 2.8 13.7% 28.6% 6.1% 6.1% 2.8 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 12.4% 25.4% 5.9% 5.9% 2.8 11.0% 22.2% 5.7% 5.7% 2.8 10 Instructor’s Manual Cash flows Net Income - Change in net working capital - Change in net long-term assets + Change in net debt = Free cash flow to equity Net operating profit after tax - Change in net working capital - Change in net long-term assets = Free cash flow to capital 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1,7 08 (598 ) (503 ) 1,7 13 (53 ) (586 ) 36 1, 442 1,7 29 (55 ) (610 ) 38 1, 446 1,7 35 (57 ) (633 ) 39 1, 441 1,7 30 (59 ) (656 ) 41 1, 427 1,7 14 (61 ) (677 ) 42 1, 401 1,6 85 (63 ) (697 ) 43 1, 363 1,6 07 (64 ) (715 ) 44 1, 276 1,5 09 (66 ) (731 ) 45 1, 171 1,3 92 (69 ) (773 ) 48 1, 034 2012 1,8 54 (53 ) (586 ) 1, 215 2013 1,8 80 (55 ) (610 ) 1, 215 2014 1,8 97 (57 ) (633 ) 1, 206 2015 1,9 03 (59 ) (656 ) 1, 188 2016 1,8 99 (61 ) (677 ) 1, 160 2017 1,8 81 (63 ) (697 ) 1, 121 2018 1,8 14 (64 ) (715 ) 1, 035 2019 1,7 29 (66 ) (731 ) 93 2020 1,6 24 (69 ) (773 ) 78 633 1,24 2011 1,8 32 (598 ) (503 ) 731 Note: 2021 input values same as 2020 Also, net operating working capital to sales ratio for 2011 is an actual © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Chapter Prospective Analysis: Valuation Implementation 11 4. Calculate TJX’s cash payouts to its shareholders in the years 2011–2020 that are implicitly assumed in the projections in Table 8-2 The cash payouts made to shareholders are simply the free cash flows to equity These are the surplus cash flows available after reinvesting needed funds in working capital and assets The values are presented in Table 8-2 and are $1,387.6 in 2011, declining to $1,024.7 in 2020 5. How would the abnormal earnings calculations in Table 8-3 change if the cost of equity assumption is changed to 12%? 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1, 305 38.9% 1, 277 34.7% 1, 257 31.7% 1, 226 28.7% 1, 183 25.8% 1, 125 22.9% 1, 054 20.0% 93 16.5% 78 13.1% 62 9.7% Equity Valuation Abnormal earnings Abnormal ROE © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 12 Instructor’s Manual 6. What would be the total equity value (as calculated for scenarios in Table 8-6 using abnormal earnings) if the sales growth in years 2021 and beyond is 8.5 percent and the company is able to generate abnormal returns at the same level as in fiscal 2020 forever (keeping all the other assumptions in the table unchanged)? Sales growth rate NOPAT margin WC to sales LT assets to sales Debt ratio After tax cost of debt 2011 5.7% 7.9% 0.6% 33.4% 57.5% 2.73% 2012 6.6% 7.5% 1.0% 34.0% 57.5% 2.73% 2013 7.1% 7.1% 1.0% 34.3% 57.5% 2.73% 2014 6.9% 6.7% 1.0% 34.5% 57.5% 2.73% 2015 6.7% 6.3% 1.0% 34.8% 57.5% 2.73% 2016 6.5% 5.9% 1.0% 35.0% 57.5% 2.73% 2017 6.3% 5.5% 1.0% 35.3% 57.5% 2.73% 2018 6.1% 5.0% 1.0% 35.5% 57.5% 2.73% 2019 5.9% 4.5% 1.0% 35.8% 57.5% 2.73% 2020 5.7% 4.0% 1.0% 36.0% 57.5% 2.73% 2021 8.5% 4.0% 1.0% 36.0% 57.5% 2.73% 23,1 93 1,8 32 24 1,7 08 24,7 24 1,8 54 36 1,7 19 26,4 79 1,8 80 46 1,7 34 28,3 06 1,8 97 58 1,7 39 30,2 03 1,9 03 69 1,7 33 32,1 66 1,8 98 82 1,7 16 34,1 92 1,8 81 94 1,6 86 36,2 78 1,8 14 08 1,6 06 38,4 18 1,7 29 21 1,5 07 40,6 08 1,6 24 36 1,3 89 44,06 1,7 08 1,7 19 1,7 34 1,7 39 1,7 33 1,7 16 1,6 86 1,6 06 1,5 07 1,3 89 Income Statement Sales Net operating profit after tax - Net interest expense after tax = Net Income - Preferred dividends = Net income to common © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 1,762 256 1,507 1,507 Chapter Prospective Analysis: Valuation Implementation 13 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 44 ,754 7, 989 247 8, 406 8,6 53 265 9, 069 9,3 34 283 9,76 10,04 302 10,4 95 10,79 322 11,2 58 11,58 342 12,0 53 12,39 363 12,8 79 13,24 384 13,7 35 14,11 406 14,6 19 15,02 441 ,541 4, 975 5,367 5,7 78 6,2 08 6,6 58 7,1 26 7,6 13 8,1 18 8,6 39 ,357 7, 899 3, 678 8,6 53 3,967 9,3 34 4,2 71 10,04 4,5 89 10,79 4,9 22 11,58 5,2 68 12,39 5,62 13,24 6,00 14,11 6,38 15,02 23.2% 50.9% 21.4% 46.7% 20.1% 43.7% 18.9% 40.7% 17.6% 37.8% 16.4% 34.9% 15.2% 32.0% 13.7% 28.5% 12.2% 25.1% 10.8% 21.7% 10.8% 21.7% 23.7% 9.6% 7.9% 7.7% 7.5% 7.2% 7.0% 6.8% 6.6% 6.4% 8.5% 16.2% 9.6% 7.9% 7.7% 7.5% 7.2% 7.0% 6.8% 6.6% 6.4% 8.5% 2.9 2.9 2.8 2.8 2.8 2.8 2.8 2.7 2.7 2.7 2.7 Beginning Balance Sheet Beg Net working capital + Beg Net long-term assets = Net operating assets Net debt + Preferred stock + Common stock = Net capital Ratios Operating return on assets Return on equity Book value of assets growth Book value of equity growth Net operating asset turnover - © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 15,862 16,302 9,373 6,929 16,302 14 Instructor’s Manual Valuation Abnormal earnings 2011 1,4 14 Discount factor Present value of abnormal earnings 0.92 1,3 00 Beginning book value 3,357 PV abnormal earnings 2011 to 2020 8,24 PV abnormal earnings 2021 on 143,6 53 Total equity value of TJX 155,2 57 2012 ,396 85 ,180 2013 2014 2015 2016 1,386 78 1,364 0.71 1,331 66 1,285 60 1,077 975 874 776 2017 ,224 56 80 2018 ,113 51 68 2019 2020 981 47 829 43 460 357 2021 99 43 88 The 8.5% terminal growth rate leads the terminal value to explode, since the cost of equity is 8.77% The denominator in the terminal value perpetuity is then 0877-.085 or 0027 This is clearly an unreasonable assumption that grossly overvalues TJX © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Chapter Prospective Analysis: Valuation Implementation 15 7. Calculate the proportion of terminal value to total estimated value of equity under the abnormal earnings method and the discounted cash flow method for the Scenario results shown in Table 8-6 Why are these proportions different? Under the abnormal earnings method, the terminal value in Table 8-6 comprises 35.5% of the total value (6381.3/17985.1) In contrast, the terminal in the free cash flow to equity method is 51.3% of the total value (9219.2/17985.1) The reason for the difference is that the abnormal earnings method contains the current book value of equity as its base, and then counts only superior earnings each year By the terminal years, given competition, this superior performance is expected to be modest In contrast, the free cash flow method values the full cash flows to shareholders, whether they are generated by normal of abnormal performance The cash flows therefore grow steadily during the terminal value period, even though much of this performance reflects merely a normal return on capital What will TJX’s cost of equity be if the equity market risk premium is percent? Market risk premium ∗ Common equity beta 5.0% 0.8 4.0% + Risk free rate 3.4% = Cost of common equity 7.4% 9. Assume that TJX changes its capital structure so that its market value weight of debt to capital increases to 30%, and its after-tax interest rate on debt at this new leverage level is 3.5% Assume that the equity market risk premium is 6.7% What will be the cost of equity at the new debt level? What will be the new weighted average cost of capital? © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 16 Instructor’s Manual The first task is to compute the new equity beta The beta of TJX’s assets will not change, since its assets are unchanged But the equity beta will increase somewhat to reflect the increased financial risk faced by shareholders Under the prior capital structure, where the pretax cost of debt was 4.4%, the risk premium was 6.7% and the risk free rate was 3.41%, TJX’s debt beta was (4.4%-3.41%)/6.7% or 0.15 Given its equity beta of 0.8 and its debt weighting of 20%, the asset beta for the company was as follows: Asset beta = Equity beta * (1 - Debt weight) + Debt beta * (Debt weight) = 0.8*.8 + 0.15*.2 = 0.67 Under the new capital structure, the debt beta will increase If the after-tax cost of debt is 3.5%, and the tax rate is 38%, the pre-tax cost of debt is 5.65%, and the debt beta will be (5.65%-3.41%)/6.7% or 0.33 The adjusted equity beta is then as follows Equity beta = [Asset beta – Debt beta * (Debt weight)]/(1-Debt weight) = [0.67 - 33*0.3]/0.7 = 0.82 Given the modest change in capital structure, the change in equity beta is very small – probably not worth worrying about The revised cost of equity and WACC will then be as follows: Cost of Equity Market risk premium 6.7% ∗ Common equity beta 0.82 5.5% + Risk free rate 3.41% = Cost of common equity 8.91% © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Chapter Prospective Analysis: Valuation Implementation 17 Weighted Average Cost of Capital After tax cost of debt ∗ Debt weight 3.5% 30.0% + Cost of common equity 8.91% ∗ (1-Debt weight) 70.0% = Weighted Average Cost of Capital 7.3% The insight for students here is to note that making modest changes in capital structure will not make a material difference in the firm’s cost of equity or WACC 10. Nancy Smith says she is uncomfortable making the assumption that TJX’s dividend payout will vary from year to year If she makes a constant dividend payout assumption, what changes does she have to make in her other valuation assumptions to make them internally consistent with each other? If Nancy Smith doesn’t want to allow dividend payout to vary across the years, then she can hold the dividend payout constant However, then she will have to allow for the capital structure to vary from year to year, since a constant dividend payout may not result in a stream of equity values that will result in a constant debt-to-equity ratio If the capital structure is allowed to vary, then the cost of capital will vary in each period as well © 2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part ... 7 ,89 742 8, 25 794 8, 84 9,454 906 10, 08 8,999 9,6 38 10,303 10,994 11,7 08 12,446 13,205 13, 984 14, 781 4,5 41 5,1 74 5,5 42 5,92 6,32 6,73 7,15 7,59 8, 04 8, 49 3,3 57 7 ,89 3 ,8 25 4,0 97 4,37 - - -. .. 21,0 58 17.6% 37 .8% 10 .8% 10 .8% 2 .8 16.4% 34.9% 10 .8% 10 .8% 2 .8 15.2% 32.0% 10 .8% 10 .8% 2 .8 13.7% 28. 5% 10 .8% 10 .8% 2.7 12.2% 25.1% 10 .8% 10 .8% 2.7 10.9% 21.7% 10 .8% 10 .8% 2.7 © 2013 Cengage Learning... 43 1,7 60 (763) 45 1 ,88 (795) 46 1, 98 (82 6) 48 2,07 (85 6) 50 2,17 (88 4) 52 2,27 (83 3) 49 2,40 1 ,83 (103 ) (652 ) 1,0 77 1,95 ( 18) (663 ) 1,2 73 2,09 ( 18) 2,23 ( 19) 2, 38 ( 20) 2,50 ( 20) 2,63