why is EV distribution important?
because it is the main determinant of bankruptcy risk, and thus consequential kd
how can companies raise necessary liquidity?
- selling assets
- issuing stock
- new debt
what are the two definitions of bankruptcy whithin the italian system?
- liquidity default: level of liquidity does not allow to pay interest or repay capital
- value default: nominal value of financial debt > ev
in reality the 3rd condition (contractual condition) must hold as well
what is the formula to analytically determine the risk premium?
[(Exp Loss + Exp BC)/Nom val Debt] * [risk free] / ([1+risk ree]^n - 1)
what is the value of bankruptcy costs as a % of enterprise value?
between 12 and 20%
what are the three factors differentiating debt?
- duration
- seniority
- guarantees
what are the steps to compute cost of equity?
- choose parameters of the analysis (returns [w/m], time horizon, reference market index)
- record the prices and transform them in returns
- calculate the beta through regression
- estimate MRP
- estimate risk free rate
- calculate Ke
what are the pros and cons of historical and implicit/expected risk premium
historical
pros: objective
cons: might not reflect current mkt conditions
expected
pros: consistent with market conditions
cons: hard to determine, uncertain, subjective
formula of adjusted beta and why do we use it
Badj = Braw*2/3 + 1/3
tendency of betas to go towards 1 in the long run
what influences beta?
- company ciclycality
- operating leverage: %change in operating income / %change in revenue (how does risk from real markets transmit to operating income)
- financial leverage
how do you compute a company’s beta trough comparables
- determine comparables
- beta of comparables
- delever betas
- compute avg and med beta
5.determine financial structure of comparables - relever beta with target financial structure
delevered beta formula
unlB = levB/[1+(1-t)*D/E]
what influences equity beta?
- Bas - Bd
- Leverage
- tax rate
what is the general range of debt beta?
0.2 - 0.25
