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Alan Kring Productions in association with Emergent Light Studio presents the Illinois

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State Collegiate Compendium, Academic Lecture in Business and Economics.

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This is Business Finance, FIL 240 for autumn semester 2023.

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Today, the cost of capital.

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I'm going to go through the markets and I have a guest speaker, an expert on market

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conditions who's going to speak for a few minutes and that'll help you help clarify

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investments that you may want to be thinking about making and then after that we'll go

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into the lecture.

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This is a mathy kind of lecture but this is where you learn how to be really grateful

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for Excel because it can make the math a lot easier.

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Now today I'll go through just the first round of it and then we'll come back and do it again

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on Wednesday to get it reinforced and I'll build the templates with you on Wednesday

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so that you see each piece of it and it kind of makes more sense to you the equations still.

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But first I'll look at the numbers and then a guest speaker.

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We have a bold day here but it's kind of an odd bold day because you have the Dow up $511

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but that's pretty meaningless.

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It's the meaningful part is 1.58%.

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Oddly though then the S&P is up only 1.20% and the NASDAQ is up only 1.16%.

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So this is sort of a reverse of what you usually see and it's all because there's some positive

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news going on but it seems like the positive news is more positive the bigger the companies

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and so hence why the Dow is up more strongly than the NASDAQ and the S&P 500 or the NASDAQ.

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Well that's okay.

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I mean it's a good day.

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Happiness is everywhere.

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So we have that going on and also notice that the rise was mostly in the morning.

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It wasn't dramatic.

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It was just a nice smooth roll upward and then it sort of leveled off.

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There was good news that was seeping into the market into the midday and then from there

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there wasn't any more bad news or good news so it kind of leveled off.

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Now notice crude.

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You remember my trading range, 82 to 88.

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Well now we've gotten toward the bottom of that trading range on oil.

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As I had said back when oil popped above 90 a barrel, well I wasn't worried about that.

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I thought it would come back into its range but now we're down there at 82.50 on the light

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sweet Brent and that's a benchmark.

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Well obviously that's good news because costs of gasoline may ease up a little more.

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It's not going to go down a lot more but we may see a little bit more easing in the price

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of gasoline and all that talk a couple months ago, well there was this Arab state and this

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other state that were, the Russia were in this deal, they were going to cut oil supply,

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oil production, that would drive the price through the roof and I said don't worry about

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it, well here you go.

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Those kinds of agreements like that don't last at all and so we're back down here on

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crude oil.

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Another thing that's going on is that it appears that the war premium has slid away completely.

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The concerns that there is a, that this fight between one of the nations of the Middle East

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and a non-state actor in the same region is going to expand, that doesn't seem to be what

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the market is seeing as possible, as probable now.

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Hence why another cause for oil prices to go up isn't there anymore.

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Moving on, the gold bugs, they've gotten above the $2,000 per ounce resistance line.

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They're convinced that the apocalypse is coming, I don't think they're going to be too happy

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that it doesn't but there you are.

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Ten-year bond, yield is up which means the price is down.

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So that would mean that investors are getting out of bonds and since stocks are going up,

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they're moving that money to equities.

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Now if I look at the SP500 volume for the day, it's about where it has been for a couple

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of weeks.

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It's not nearly the average, close to the average daily volume over the past year but

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it has made some move upward.

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So there's cautious movement back into the market.

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The idea that there's going to be this big recession coming and you still see it now,

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it's just not the numbers aren't telling us this.

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The GDP was strong, we're easing the inflation out although it doesn't look like it too much

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yet but we're getting there.

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Okay now, well the euro and the pound and the yen, now they're all appreciating against

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the dollar.

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So the dollar has weakened, depreciated against all three of those currencies.

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Nothing spectacular.

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What it looks like is that all these currencies are in a trading range right now.

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They're just bouncing around.

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For the euro it would be bouncing around 105 to 107 to the dollar and the same is happening

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with the other currencies.

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Nothing scary there at all.

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Now over here on the other side of the world, last night the Japanese yen, the Nikkei, Tokyo

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exchange, the Nikkei 225 dropped like a rock right at the opening but then it just drifted.

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So something spooked them before the trading began last night in Tokyo.

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But then from there it just kind of flowed.

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There was a little bit of a bull rally there toward the last, in the last hour and a half,

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two hours but nothing big.

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And London started out with a big pop and then it floated until after the midday and

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it eased back up a little, some.

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It backed off and then it just kind of floated toward the end.

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So what does all this mean?

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Well there's not a whole lot to worry.

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The global markets don't seem to be all that concerned about some massive recession or

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some global World War III, which is good news for you folks.

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That means that you'll probably go out into a pretty strong economy for internships and

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jobs come this summer or next fall.

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So there you are.

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That's good news.

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Now looking at a couple of companies, just for a little bit of fun, the first one I'd

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look at is, well, auto companies.

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Ford.

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Ford barely, it just died.

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Almost 2% down today.

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It is near the bottom of its 52 week trading range right now, which matter of fact, no,

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it's a little tiny bit above.

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It's bottom over the whole year.

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Now if I were to look at a year chart, look at Ford, see that intermediate declining tops?

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Do you see how the tops are declining?

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And the bottoms of the troughs are declining too.

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A technician, a technical analyst, one of the elves would say, oh, this is nasty.

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That's a bad news.

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Ford is sliding and it's going to keep sliding for a while.

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So we'll take that for what it's worth.

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If we were to look over here at General Motors, well, it was up, but notice something interesting.

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General Motors was up less than the S&P 500.

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It was up only about a little less than half of what the S&P 500 did.

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And yet GM has a beta of nearly 1.5.

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So it should magnify the market.

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And today, it was not nearly as strong as the market itself.

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So that kind of is a little bit worrisome there.

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And then a little laugh fest here, Tesla.

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Tesla is now below 200 a share.

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You're finally beginning to see the analysts coming out with the truth of the matter.

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There was a report from one reputable analyst who was saying the banks and the investment

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banks are just sick of it.

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But they can't get out.

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Because if they got out, they would crash themselves on the way out.

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And so essentially, this is the miserable little child that they thought was going to

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be so much, and it's just fizzling away.

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Car sales were hugely disappointing.

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Their great ideas that he of the cloven hoof has put forward have seemed to be nothing

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but other dreams of his.

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This is not a good sign.

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It skidded almost 5% today in a market that was bullish today.

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And so that gives you a caution.

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Don't jump into stocks just because there is a fad going on with them, or you like the

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guy for his toughness and all that bull.

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You look at the numbers.

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You look at the market.

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You look at the competitive landscape, the technologies, and it just wasn't there.

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And his history of fiascos and the ones coming after it, like Twitter.

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But there is a bull market going on.

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And I do want to give you some...

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I would say this is a bullish investor, bullish expert, in fact.

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I'm going to go out and get him so that you can have a chance to hear him.

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Hi, I'm a bull, and I'm here to talk to you about bull markets.

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Bull markets are where it's at.

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The market is going to go up permanently, and I should know because I'm a bull.

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And don't believe anyone who tells you differently.

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You hear these investors talking about bear markets, these experts talking about bear

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markets.

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I'm going to tell you that there is no such thing as a bear.

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Bears do not exist.

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They are a myth.

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I have never heard of a bear in my life.

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Mo?

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No, no, no, leave me alone.

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Get away.

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Get away.

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No, it's a bear market.

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Help, no.

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Mo, Mo.

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Mo.

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Mo.

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Component cost of capital.

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Today's lecture is on the cost of capital.

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What happens in this classroom stays in this classroom.

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In accounting, numbers, dollars are everything.

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One of the biggest distinctions between finance and accounting is that we really don't care

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about the dollar values.

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What we care about are percentages.

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Cost to an accountant is in dollars.

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Cost to us in finance is in percentages.

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And so when we talk about the cost of capital, each one of these component costs is going

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to be a percentage.

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And so it seems a little odd to talk about the cost as a percentage, but you've already

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seen me doing it on a number of occasions.

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You talk about on a financial statement, in the income statement, you have your revenues

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minus your cost of goods sold is your gross income or gross profit.

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We don't care about that.

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We care about the gross margin, the percentage.

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All of those ratios were percentages.

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Well, a few of them were multiples, but we didn't talk about dollars at all.

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And in fact, you've seen the first of that when I talked about debt.

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PVZ 5.0% 2038, there's a cost, the coupon.

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Now I can turn that into, that's a coupon rate.

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Now I can turn that into dollars.

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You would take the face value, which is always 1,000, times 5.5%, 5.0%, and you would get

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$55.

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That is the dollar amount.

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We don't care about that.

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You say, well, you better care about the cost at some point in dollars.

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Well, we do that, but mostly we just let the accountants do that.

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But that's the cost of debt.

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5.50%.

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Now that's a preliminary.

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We have to dig a little deeper, because that 5.50% is actually old history.

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This bond, 10-, 20-, or 30-year bond, it was issued in 2028, well, no, it wouldn't have

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been in 2028.

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That cost right there is old news.

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It really doesn't mean much of anything other than that's what we have to pay.

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But in terms of what is the current cost, we'd have to do some more work on that.

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So anyway, the components of the overall cost of capital.

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There's the cost of debt.

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And then there's these two equity costs, the cost of preferred stock and the cost of common

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stock.

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Now there's one thing I should point out in here, and I'm not going to do it in this lecture.

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I'll do it in this one.

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There's actually a different cost to your existing common and to new common.

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The cost of new common is kind of high.

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Cost of, well, okay.

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Usually debt is cheaper than equity, usually.

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And you'll see the racking of the numbers up like this.

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Now the one that, debt is pretty easy.

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It's just a really simple formula.

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Preferred is easy.

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It's just a simple formula.

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The one that can kind of get you is this common, because we can't use the same formula every

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time.

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It depends on the company, what type of company it is.

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But the good news is that we've got Excel, which makes it a lot easier whichever way

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you want to do it.

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You've got a way to do it in Excel without tripping over the numbers too much.

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But okay.

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See this number right here?

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The problem is that the coupon is historical.

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It's old.

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This coupon could have been established as a required rate of return back in 2018 before

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interest rates went bananas upward, or 2008.

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So we need a more current number than the coupon.

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And we have one.

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It's pretty easy.

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We use the yield to maturity, the YTM, because that's what the market is currently saying

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the company should be paying.

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Well the yield to maturity right now, in actual practical terms, you'll see bonds that have

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coupons like 5.50%, but their yield to maturity is up there like 7%, 7.5% now, because interest

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rates have risen.

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So we've got to look at what the current market conditions are.

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So instead of using the coupon rate, we will usually use the yield to maturity.

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Now the way the homework used to go is they said just use the coupon rate.

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But now in your homework they will say, okay, the yield to maturity is.

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Or you could calculate the yield to maturity with that bond calculation sheet that I gave

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you, as long as you know the price of the debt and the term.

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But anyway, so there's one other factor involved with the cost of debt.

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Interest expense is deducted before the company calculates its taxes.

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So interest expense represents a tax shield.

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00:19:17,400 --> 00:19:34,560
So in other words, the after-tax cost of debt would be the before-tax cost of debt times

239
00:19:34,560 --> 00:19:45,400
one minus the company's tax rate.

240
00:19:45,400 --> 00:19:55,640
Now remember that this will be the yield to maturity, not the coupon.

241
00:19:55,640 --> 00:20:00,320
I mean if you don't have the yield to maturity, you can use the coupon, but you've just got

242
00:20:00,320 --> 00:20:04,240
to recognize that you're probably going to be off.

243
00:20:04,240 --> 00:20:26,800
So for example, in this suppose that the current yield to maturity on PVZ debt is 6.15%.

244
00:20:26,800 --> 00:20:35,920
So in this case, the after-tax cost of debt, R with a superscript AT for after-tax and

245
00:20:35,920 --> 00:20:45,320
a subscript D would be 6.15%, the yield to maturity, times one minus the marginal tax

246
00:20:45,320 --> 00:20:47,720
rate, which is currently 21%.

247
00:20:47,720 --> 00:21:00,920
And I'm going to do that on the calculator the next time I'll be using Excel to do it.

248
00:21:00,920 --> 00:21:12,600
So I would take 6.15 times, open parenthesis, one minus.21, close the parenthesis, and

249
00:21:12,600 --> 00:21:28,760
now I get an after-tax cost of debt of 4.8585.

250
00:21:28,760 --> 00:21:32,960
That's the cost of debt.

251
00:21:32,960 --> 00:21:41,160
And that's the formula for getting it.

252
00:21:41,160 --> 00:21:48,880
Just have these in your notes and on your note card, and also we'll have a model in

253
00:21:48,880 --> 00:21:49,880
Excel.

254
00:21:49,880 --> 00:21:51,520
I'll build the model in Excel with you.

255
00:21:51,520 --> 00:21:54,960
We'll do it all together on Wednesday.

256
00:21:54,960 --> 00:22:01,000
I'll even show you some new tricks I'll bet you've never seen before in Excel that make

257
00:22:01,000 --> 00:22:05,080
some kinds of calculations super easy.

258
00:22:05,080 --> 00:22:10,960
Okay, cost of capital, debt is finished.

259
00:22:10,960 --> 00:22:24,240
Now the cost of preferred stock is also pretty darn sweet.

260
00:22:24,240 --> 00:22:31,320
And this is a nasty trick, and you'll see me do it two times in this lecture.

261
00:22:31,320 --> 00:22:35,280
Okay, preferred.

262
00:22:35,280 --> 00:22:45,320
I showed you a formula for price right now of preferred stock, and I'll put PRF down

263
00:22:45,320 --> 00:22:52,200
here, price now of preferred stock is going to be equal, this was a formula I showed you

264
00:22:52,200 --> 00:23:01,400
before, the dividend, the constant dividend divided by the required rate of return.

265
00:23:01,400 --> 00:23:08,680
In other words, what investors want that to be paying as far as the percentage return.

266
00:23:08,680 --> 00:23:15,800
That was the formula I gave you last week, or two weeks ago.

267
00:23:15,800 --> 00:23:18,800
Okay.

268
00:23:18,800 --> 00:23:47,240
2.85% preferred par value, $75 per share, is currently priced

269
00:23:47,240 --> 00:24:13,920
at $38.25 per share.

270
00:24:13,920 --> 00:24:18,960
Now let's go back over to this formula that I gave you a couple weeks ago, and let me

271
00:24:18,960 --> 00:24:30,560
turn it around so that R preferred is equal to the dividend divided by the price, the

272
00:24:30,560 --> 00:24:36,880
current price of the preferred.

273
00:24:36,880 --> 00:24:43,120
I just multiplied R on both sides and divided by P0 on both sides.

274
00:24:43,120 --> 00:24:47,920
So now I have a formula for calculating the cost of preferred.

275
00:24:47,920 --> 00:24:50,000
I can do it.

276
00:24:50,000 --> 00:24:56,800
So the cost of preferred is going to be the dividend.

277
00:24:56,800 --> 00:25:08,720
So the dividend is just 2.85% of times $75.

278
00:25:08,720 --> 00:25:32,400
So the dividend is going to be.025.0285 times 75 divided by $38.25.

279
00:25:32,400 --> 00:25:40,840
5.59%.

280
00:25:40,840 --> 00:25:45,280
Oops.

281
00:25:45,280 --> 00:25:50,800
Did I do that right?

282
00:25:50,800 --> 00:25:52,280
Let me get the dividend first.

283
00:25:52,280 --> 00:25:54,280
I apologize for that.

284
00:25:54,280 --> 00:25:56,560
I should have just shown you.

285
00:25:56,560 --> 00:25:57,880
I did the whole formula.

286
00:25:57,880 --> 00:26:05,520
Let me just get the dividend first real fast,.0285 times $75.

287
00:26:05,520 --> 00:26:16,360
So the dividend is $2.13.75.

288
00:26:16,360 --> 00:26:30,080
And then I'll take the $2.13.75 divided by the current price, which is $38.25.

289
00:26:30,080 --> 00:26:32,320
I did the whole formula.

290
00:26:32,320 --> 00:26:43,440
And then that's how you get the, well, let's divide it by $38.25.

291
00:26:43,440 --> 00:26:46,880
Get that number back again.

292
00:26:46,880 --> 00:26:58,080
5.59%.

293
00:26:58,080 --> 00:27:04,460
That's the cost of preferred stock.

294
00:27:04,460 --> 00:27:14,760
So now I've got the formula for the cost of preferred.

295
00:27:14,760 --> 00:27:23,660
Just take the dividend divided by the current price of the preferred.

296
00:27:23,660 --> 00:27:26,240
So there's another one.

297
00:27:26,240 --> 00:27:28,240
Done.

298
00:27:28,240 --> 00:27:47,720
The last one is the pain.

299
00:27:47,720 --> 00:27:50,960
Cost of common.

300
00:27:50,960 --> 00:27:56,000
Start with the one that's the easiest.

301
00:27:56,000 --> 00:28:02,880
An older company that has a stable dividend growth rate.

302
00:28:02,880 --> 00:28:06,640
I gave you the formula for common stock.

303
00:28:06,640 --> 00:28:11,360
By the way, the book says the cost of retained earnings.

304
00:28:11,360 --> 00:28:17,960
That's not really a good way to put it, but common stock.

305
00:28:17,960 --> 00:28:35,200
Now if the company has a constant growth rate of dividends, we have a formula for the price.

306
00:28:35,200 --> 00:28:44,840
Remember the price right now, and we'll use an S for common stock, would be the dividend

307
00:28:44,840 --> 00:28:52,840
in period one over the cost of common minus the growth rate.

308
00:28:52,840 --> 00:29:01,520
Where D1 is the current dividend grown one period.

309
00:29:01,520 --> 00:29:03,880
That's the formula I gave you last week.

310
00:29:03,880 --> 00:29:09,020
It applies only to companies that have a constant growth in the dividends.

311
00:29:09,020 --> 00:29:26,240
Older companies, companies that are stable.

312
00:29:26,240 --> 00:29:33,520
Now I'm going to do some cross multiplication here.

313
00:29:33,520 --> 00:29:34,880
You don't need to write this down.

314
00:29:34,880 --> 00:29:36,360
I'm just showing you how I get.

315
00:29:36,360 --> 00:29:41,000
I'm going to tease out the R sub S, the cost of common stock.

316
00:29:41,000 --> 00:29:54,280
I'm going to cross multiply so I get R sub S minus G equals D1 over P0 of the stock.

317
00:29:54,280 --> 00:30:00,080
I just multiply both sides by this and divide both sides by the price.

318
00:30:00,080 --> 00:30:10,520
And so finally, the cost of the common stock would be the dividend in period one divided

319
00:30:10,520 --> 00:30:18,560
by P0 sub S plus, I'm going to add the growth rate to both sides.

320
00:30:18,560 --> 00:30:20,980
That's all I did in that step.

321
00:30:20,980 --> 00:30:25,840
So now I have a formula for calculating the cost of common stock.

322
00:30:25,840 --> 00:30:32,640
But it applies only if the company has a constant growth rate of dividends.

323
00:30:32,640 --> 00:30:35,440
So it doesn't apply to all companies.

324
00:30:35,440 --> 00:30:41,020
But it's a place to start.

325
00:30:41,020 --> 00:30:51,300
So on this one, our first formula is R sub, the cost of common stock is the dividend in

326
00:30:51,300 --> 00:31:02,160
period one divided by the current price of the stock plus the growth rate.

327
00:31:02,160 --> 00:31:31,960
PVZ common just paid a $2.50 per share dividend.

328
00:31:31,960 --> 00:31:54,920
That is expected to grow at a constant rate of 3% for the foreseeable

329
00:31:54,920 --> 00:32:02,040
future.

330
00:32:02,040 --> 00:32:28,920
The current price of PVZ common is $20.30 per share.

331
00:32:28,920 --> 00:32:35,160
Let's write that down.

332
00:32:35,160 --> 00:32:40,840
And now I'm going to use a formula to get it.

333
00:32:40,840 --> 00:32:43,480
Okay.

334
00:32:43,480 --> 00:32:46,160
First thing I'm going to need is D1.

335
00:32:46,160 --> 00:32:52,000
D1 is the current dividend times one plus the growth rate.

336
00:32:52,000 --> 00:33:11,080
So that would be the current dividend, which is $2.50 times one plus.03.

337
00:33:11,080 --> 00:33:28,720
So what did I say, $2.50 times 1.03 equals 2.575.

338
00:33:28,720 --> 00:33:40,440
$2.57.

339
00:33:40,440 --> 00:33:58,760
So the cost of common is going to be 2.575 over the current price, which is $20.30.

340
00:33:58,760 --> 00:34:01,440
And then plus out here.

341
00:34:01,440 --> 00:34:09,620
Make sure you keep that plus.03 separated.

342
00:34:09,620 --> 00:34:19,400
So I'm going to take the 2.575 divided by the current price, $20.30, and then I'm going

343
00:34:19,400 --> 00:34:23,800
to add the.03.

344
00:34:23,800 --> 00:34:26,680
15.68%.

345
00:34:26,680 --> 00:34:47,000
15.68%.

346
00:34:47,000 --> 00:34:50,880
So there you go.

347
00:34:50,880 --> 00:34:51,880
That's how you do it.

348
00:34:51,880 --> 00:34:52,880
Just an example.

349
00:34:52,880 --> 00:34:54,840
And I'll do this again on Wednesday.

350
00:34:54,840 --> 00:35:01,720
I'm not going to leave you hanging with just one example, but we will use Excel to accelerate

351
00:35:01,720 --> 00:35:06,560
this process.

352
00:35:06,560 --> 00:35:07,560
Where am I?

353
00:35:07,560 --> 00:35:08,560
Okay.

354
00:35:08,560 --> 00:35:10,760
Here's the problem.

355
00:35:10,760 --> 00:35:16,680
Not all companies are old and have that constant growth rate.

356
00:35:16,680 --> 00:35:27,600
However, this model for old companies is informative.

357
00:35:27,600 --> 00:35:31,920
It gives us an insight, a couple of insights.

358
00:35:31,920 --> 00:35:40,600
Notice that the cost of equity, and therefore the overall cost of capital, goes up as the

359
00:35:40,600 --> 00:35:45,600
price of a stock goes down.

360
00:35:45,600 --> 00:35:50,160
That is something that companies kind of don't pay attention to.

361
00:35:50,160 --> 00:35:57,820
Is that over a long period of time, if their stock price is going down, the cost of equity

362
00:35:57,820 --> 00:36:00,560
is going up.

363
00:36:00,560 --> 00:36:07,360
There were a couple of examples when I was a consultant where at a meeting I would say

364
00:36:07,360 --> 00:36:09,440
our stock price is going down.

365
00:36:09,440 --> 00:36:11,200
It's going to the toilet.

366
00:36:11,200 --> 00:36:15,840
And I would get this response like, well, yeah, so it doesn't affect us.

367
00:36:15,840 --> 00:36:18,140
What's that going to do?

368
00:36:18,140 --> 00:36:22,560
The first thing is, well, if you go out there and try to raise more equity capital, you're

369
00:36:22,560 --> 00:36:25,520
selling the stock at a low price.

370
00:36:25,520 --> 00:36:28,860
So obviously right there you've got a problem.

371
00:36:28,860 --> 00:36:32,640
The second problem is a little bit subtler.

372
00:36:32,640 --> 00:36:34,320
The second issue.

373
00:36:34,320 --> 00:36:37,800
No, but let me point that out.

374
00:36:37,800 --> 00:36:41,940
That stock price going down is like a fever.

375
00:36:41,940 --> 00:36:43,760
You don't, a low grade fever.

376
00:36:43,760 --> 00:36:51,000
A company doesn't even notice it at first, but it has a cumulative effect on the company's

377
00:36:51,000 --> 00:36:59,320
operations because the cost of one of its components, component cost of capital, is

378
00:36:59,320 --> 00:37:00,320
rising.

379
00:37:00,320 --> 00:37:11,480
Therefore, the entire capital structure of the company is becoming more costly.

380
00:37:11,480 --> 00:37:12,960
And that's a problem.

381
00:37:12,960 --> 00:37:15,320
And it hurts over a period of time.

382
00:37:15,320 --> 00:37:21,760
That's why when you see a Tesla beginning to slide, that's not just, ah, well, it's

383
00:37:21,760 --> 00:37:25,080
going to be a bad, yeah, stock is going down in price.

384
00:37:25,080 --> 00:37:29,780
No, that could be an indicator of something more darker.

385
00:37:29,780 --> 00:37:30,780
It's like Ford.

386
00:37:30,780 --> 00:37:37,400
When I see Ford heading for its 52 week low, and it doesn't seem to want to stop because

387
00:37:37,400 --> 00:37:41,280
both the tops and the bottoms are skidding together.

388
00:37:41,280 --> 00:37:42,700
Well that's an issue.

389
00:37:42,700 --> 00:37:50,880
That's something that is telling me Ford might be in more trouble than we think because it's,

390
00:37:50,880 --> 00:37:53,320
yeah, the stock price is going down.

391
00:37:53,320 --> 00:37:54,560
Boo hoo.

392
00:37:54,560 --> 00:38:00,800
But that tells us that there's a deeper, the whole capital structure is becoming cheap,

393
00:38:00,800 --> 00:38:04,560
more and more expensive over time.

394
00:38:04,560 --> 00:38:06,440
There's another one there.

395
00:38:06,440 --> 00:38:10,200
See that growth, that plus G?

396
00:38:10,200 --> 00:38:17,000
In other words, as a company's growth rate increases, its cost of equity capital increases

397
00:38:17,000 --> 00:38:18,560
as well.

398
00:38:18,560 --> 00:38:25,840
Now what that tells us, find another marker here if I can.

399
00:38:25,840 --> 00:38:37,640
What that tells us is that there is a, there we go, this is the marker.

400
00:38:37,640 --> 00:38:43,040
That tells us that growth actually costs.

401
00:38:43,040 --> 00:38:49,480
In fact, I don't do it directly in this class but I will tell you about it.

402
00:38:49,480 --> 00:38:57,520
In my, another class I'm teaching, a higher level finance class, it actually is the case

403
00:38:57,520 --> 00:39:06,580
that the, there is a growth rate called the sustainable maximum.

404
00:39:06,580 --> 00:39:13,240
If a company stays above that growth rate, the company will actually die.

405
00:39:13,240 --> 00:39:20,600
We have a number of examples of just that problem happening with companies.

406
00:39:20,600 --> 00:39:29,360
They actually bit the dust because their growth rate was unsustainable.

407
00:39:29,360 --> 00:39:37,240
That seems like that's almost like, that's counterintuitive but it actually is the case.

408
00:39:37,240 --> 00:39:44,920
If that growth rate gets too high, the cost of equity capital gets so bad that the overall

409
00:39:44,920 --> 00:39:48,520
cost of capital breaks the company.

410
00:39:48,520 --> 00:39:50,880
It breaks the company's back.

411
00:39:50,880 --> 00:39:53,760
Like I said, we have plenty of examples of that.

412
00:39:53,760 --> 00:39:56,200
We've seen it in practice.

413
00:39:56,200 --> 00:40:00,800
Just because a company is, yeah, grow, grow, grow, boy is this incredible.

414
00:40:00,800 --> 00:40:03,760
Year after year this growth is incredible.

415
00:40:03,760 --> 00:40:05,320
You don't want that.

416
00:40:05,320 --> 00:40:12,840
Now one or two years of rapid growth, yeah, that's great but it has to slow down or it's

417
00:40:12,840 --> 00:40:15,920
going to burn itself out.

418
00:40:15,920 --> 00:40:25,020
And so that formula, that model there gives us a window into why growth isn't always just

419
00:40:25,020 --> 00:40:29,360
year after year after year of accelerating growth.

420
00:40:29,360 --> 00:40:30,420
Can't do it.

421
00:40:30,420 --> 00:40:32,360
The company will die.

422
00:40:32,360 --> 00:40:35,160
Think about this.

423
00:40:35,160 --> 00:40:39,880
You sir are my son.

424
00:40:39,880 --> 00:40:44,620
When you were a toddler, hi daddy.

425
00:40:44,620 --> 00:40:48,560
And then one day you come in and you're the incredible bulk.

426
00:40:48,560 --> 00:40:49,560
Oh my God.

427
00:40:49,560 --> 00:40:53,320
Whoa, whoa, what the hey.

428
00:40:53,320 --> 00:40:56,140
You have grown too fast.

429
00:40:56,140 --> 00:40:58,560
Your bones can't keep up.

430
00:40:58,560 --> 00:41:04,520
You walk through the front door and you crack your head on the ceiling of the top of the

431
00:41:04,520 --> 00:41:06,440
door.

432
00:41:06,440 --> 00:41:09,520
That is the same process.

433
00:41:09,520 --> 00:41:14,120
Growth going on too fast weakens the company.

434
00:41:14,120 --> 00:41:18,080
That's why there is such a thing as maximum sustainable growth rate.

435
00:41:18,080 --> 00:41:19,680
It's a formula.

436
00:41:19,680 --> 00:41:26,880
I just showed it last week in another class and then I showed some examples of companies.

437
00:41:26,880 --> 00:41:27,880
This company died.

438
00:41:27,880 --> 00:41:29,360
Well, let's look at its growth rate.

439
00:41:29,360 --> 00:41:31,120
Well, I'll be darned.

440
00:41:31,120 --> 00:41:34,400
Let's calculate the maximum sustainable growth rate.

441
00:41:34,400 --> 00:41:39,960
It was above maximum sustainable growth rate for three, four, five years.

442
00:41:39,960 --> 00:41:41,920
No surprise that it died.

443
00:41:41,920 --> 00:41:44,320
Okay, so enough of that.

444
00:41:44,320 --> 00:41:54,680
What do we use though if you don't have a company that is old, it's got a constant growth

445
00:41:54,680 --> 00:41:55,680
rate?

446
00:41:55,680 --> 00:41:56,680
Still trying to find another.

447
00:41:56,680 --> 00:41:59,680
Let me see if this one works.

448
00:41:59,680 --> 00:42:03,440
Okay, that's what I'll do.

449
00:42:03,440 --> 00:42:13,320
What happens if we have a company that is an old growth, constant growth rate?

450
00:42:13,320 --> 00:42:16,680
Okay, do we have anything else we can do?

451
00:42:16,680 --> 00:42:21,880
Well, yeah, I showed you one.

452
00:42:21,880 --> 00:42:27,640
You can use the capital asset pricing model.

453
00:42:27,640 --> 00:42:35,760
The expected return to a stock is going to be the risk free rate plus the beta of the

454
00:42:35,760 --> 00:42:44,520
stock times the expected return to the market portfolio minus the risk free rate.

455
00:42:44,520 --> 00:42:48,640
This marker isn't working either too well.

456
00:42:48,640 --> 00:42:53,480
Okay, yeah, you can use it.

457
00:42:53,480 --> 00:42:56,520
I mean, it's there.

458
00:42:56,520 --> 00:42:58,080
It's a solid model.

459
00:42:58,080 --> 00:43:03,160
We usually use it to calculate investments, the expected return to a stock that you've

460
00:43:03,160 --> 00:43:12,160
bought, but it's perfectly fine to use for calculating the cost of equity capital because

461
00:43:12,160 --> 00:43:20,240
at least theoretically, the expected return to the investors would be the expected cost

462
00:43:20,240 --> 00:43:23,440
to the company of the stock.

463
00:43:23,440 --> 00:43:26,840
They should be about the same.

464
00:43:26,840 --> 00:43:32,080
So the cap M can be used.

465
00:43:32,080 --> 00:43:38,600
Our results are mixed, so using cap M. Now, if you were to use the, you've got an old

466
00:43:38,600 --> 00:43:39,600
company.

467
00:43:39,600 --> 00:43:44,560
Okay, let's use this constant dividend growth model to get the cost of equity, and then

468
00:43:44,560 --> 00:43:49,080
let's use the cap M to get the cost of equity.

469
00:43:49,080 --> 00:43:56,280
Usually they're pretty close, but sometimes they are spectacularly different.

470
00:43:56,280 --> 00:44:01,800
And there are theories of why this happens.

471
00:44:01,800 --> 00:44:05,180
It's not normal, but it does happen.

472
00:44:05,180 --> 00:44:11,300
So you have to kind of take your choice.

473
00:44:11,300 --> 00:44:15,800
One thing that is done oftentimes in older companies where you can use a constant growth

474
00:44:15,800 --> 00:44:22,640
rate dividend model, but you can also use a cap M, there's a beta, you take the average

475
00:44:22,640 --> 00:44:24,820
of the two numbers.

476
00:44:24,820 --> 00:44:27,680
This one came out with a cost.

477
00:44:27,680 --> 00:44:30,800
Did I throw it away?

478
00:44:30,800 --> 00:44:32,280
It's a rate.

479
00:44:32,280 --> 00:44:37,480
Suppose that the cap M came out with 16.27.

480
00:44:37,480 --> 00:44:41,800
You'd probably take the average of those two.

481
00:44:41,800 --> 00:44:52,360
However, there are companies that don't have a beta, and you can always get a beta from

482
00:44:52,360 --> 00:44:56,480
a comparable and take a stab at it that way.

483
00:44:56,480 --> 00:45:05,080
But there's a third way too.

484
00:45:05,080 --> 00:45:07,880
It's called the bond yield plus equity premium.

485
00:45:07,880 --> 00:45:12,120
I'll just throw an example at you.

486
00:45:12,120 --> 00:45:40,160
Suppose that PVZ is in an industry that has

487
00:45:40,160 --> 00:46:05,320
an average cost of equity of 20, let's say 24.60 percent.

488
00:46:05,320 --> 00:46:07,120
That's the industry average.

489
00:46:07,120 --> 00:46:13,360
So yeah, well we could use that directly, we could say, well let's use that for PVZ.

490
00:46:13,360 --> 00:46:18,680
Probably we can do a little better.

491
00:46:18,680 --> 00:46:47,240
The industry average for bond yields is, let's say, the average

492
00:46:47,240 --> 00:47:05,440
current industry for bond yields is, let's say, 6.70 percent.

493
00:47:05,440 --> 00:47:25,280
Now here's the theory that the cost of equity is the bond yield of the

494
00:47:25,280 --> 00:47:33,280
company plus an equity risk premium.

495
00:47:33,280 --> 00:47:42,080
In other words, we are postulating that the cost of equity is the cost of debt plus an

496
00:47:42,080 --> 00:47:50,480
extra kicker because it's equity, so it's riskier.

497
00:47:50,480 --> 00:48:02,920
So what we are using here is we're saying that in the industry 4.60 percent is going

498
00:48:02,920 --> 00:48:13,120
to be equal to the bond yield to maturity, the average bond yield to maturity plus an

499
00:48:13,120 --> 00:48:30,920
industry equity premium.

500
00:48:30,920 --> 00:48:45,200
Now if I work that around, and of course I don't use simple numbers, the industry is

501
00:48:45,200 --> 00:49:00,360
telling us, and of course I exited the calculator, is telling us that 24.60 percent minus 6.70

502
00:49:00,360 --> 00:49:12,880
percent is the industry equity premium, 17.9 percent.

503
00:49:12,880 --> 00:49:23,680
17.90 percent is the industry's equity premium.

504
00:49:23,680 --> 00:49:32,760
So if I can get the yield to maturity of PVZ and add it to the industry equity premium,

505
00:49:32,760 --> 00:49:39,120
I'd have an estimate of PVZ's cost of equity.

506
00:49:39,120 --> 00:49:45,480
And of course I erased the, what did I find that bond yield was?

507
00:49:45,480 --> 00:49:50,480
For heaven's sake, I can't even remember.

508
00:49:50,480 --> 00:49:52,480
I erased it.

509
00:49:52,480 --> 00:49:59,240
Oh well.

510
00:49:59,240 --> 00:50:11,280
The yield to maturity was, I think it was something like 4.79 percent, something like

511
00:50:11,280 --> 00:50:12,280
that.

512
00:50:12,280 --> 00:50:13,840
I can't remember what I put down.

513
00:50:13,840 --> 00:50:16,060
I erased it for some reason.

514
00:50:16,060 --> 00:50:27,640
So in other words, my guess would be that the cost of equity for PVZ would be that yield

515
00:50:27,640 --> 00:50:38,880
to maturity 4.79 percent plus the equity premium of 17.90 percent.

516
00:50:38,880 --> 00:50:43,880
That'd be my stab.

517
00:50:43,880 --> 00:50:52,060
So I'd take the 17.9 percent plus, that's the industry equity premium, and add it to

518
00:50:52,060 --> 00:51:09,440
the yield to maturity for this company's debt overall, 4.79, 22.69 percent.

519
00:51:09,440 --> 00:51:17,280
It's a stab.

520
00:51:17,280 --> 00:51:21,920
The funniest thing is, it's the least accurate.

521
00:51:21,920 --> 00:51:30,800
And it almost always is quite a ways away from the dividend growth model result, the

522
00:51:30,800 --> 00:51:34,080
capital asset pricing model result.

523
00:51:34,080 --> 00:51:44,120
However, it is actually quite popular these days.

524
00:51:44,120 --> 00:51:49,680
Aside from the fact that it's easy to calculate, you just get the industry equity premium.

525
00:51:49,680 --> 00:51:55,160
You can even look that up on Standard Ports Global Net Advantage.

526
00:51:55,160 --> 00:52:03,960
Type in the SIC code of the industry, and you'll get this list of all these different

527
00:52:03,960 --> 00:52:06,240
averages for the industry.

528
00:52:06,240 --> 00:52:08,540
Equity premium is one of them you get.

529
00:52:08,540 --> 00:52:15,080
So you can just take a company's bond yield to maturity and add it to the equity premium,

530
00:52:15,080 --> 00:52:22,720
and there you've got the company's, an estimate of the company's cost of equity.

531
00:52:22,720 --> 00:52:30,280
It is usually, and I did it here, if you saw I was trying to think of numbers to do, it's

532
00:52:30,280 --> 00:52:38,320
usually quite a bit higher for some reason than the other two would be.

533
00:52:38,320 --> 00:52:41,640
But still, it's kind of a hot item.

534
00:52:41,640 --> 00:52:51,080
The argument against it is that there are too many factors in any given company that

535
00:52:51,080 --> 00:52:59,600
make it so that looking at averages and applying them to the company is not a good idea.

536
00:52:59,600 --> 00:53:05,960
There's too many weird things about you to consider averages.

537
00:53:05,960 --> 00:53:11,680
Well, the average guy is 5'8".

538
00:53:11,680 --> 00:53:14,020
Now you're not 5'8", are you?

539
00:53:14,020 --> 00:53:17,320
The average guy is 200 pounds.

540
00:53:17,320 --> 00:53:18,800
You're not 200 pounds.

541
00:53:18,800 --> 00:53:21,400
If you are, you need to lay off the food, okay?

542
00:53:21,400 --> 00:53:25,440
Really, all you can eat cheeseburgers at Earl's House of Cheeseburgers?

543
00:53:25,440 --> 00:53:27,100
You got to quit.

544
00:53:27,100 --> 00:53:32,360
Your metabolism is slowing down, like mine did.

545
00:53:32,360 --> 00:53:35,080
But that's the argument against it.

546
00:53:35,080 --> 00:53:41,600
You're looking at too many things about an individual company that are different from

547
00:53:41,600 --> 00:53:47,240
the industry to say, well, the equity premium of the industry is the equity premium of this

548
00:53:47,240 --> 00:53:48,960
company.

549
00:53:48,960 --> 00:53:51,880
No, not likely.

550
00:53:51,880 --> 00:53:56,640
But like I said, it's very popular.

551
00:53:56,640 --> 00:54:09,000
Now, taking all this off, and again, if you know my style, I'll go back and do this again.

552
00:54:09,000 --> 00:54:26,600
But getting to the end, first things first, the term capital structure.

553
00:54:26,600 --> 00:54:40,500
The capital structure of a company is the combination of debt and equity that makes

554
00:54:40,500 --> 00:54:42,940
the total assets.

555
00:54:42,940 --> 00:54:51,120
The capital structure of a company is the combination of the percent of debt and the

556
00:54:51,120 --> 00:54:57,600
percent of equity that makes up the total assets.

557
00:54:57,600 --> 00:55:05,360
The capital structure is a combination of the percent of debt and the percent of equity

558
00:55:05,360 --> 00:55:10,400
that makes up the capital structure.

559
00:55:10,400 --> 00:55:17,600
So in other words, I could say, well, the capital structure is 25% debt, 75% equity.

560
00:55:17,600 --> 00:55:24,120
Where the capital structure is 50% debt, 50% equity.

561
00:55:24,120 --> 00:55:32,600
That's all it says is how much debt and how much equity as percentages add up to 100%

562
00:55:32,600 --> 00:55:33,880
of the company.

563
00:55:33,880 --> 00:55:34,880
That's all it is.

564
00:55:34,880 --> 00:55:36,720
Nothing complicated about it.

565
00:55:36,720 --> 00:55:44,160
However, behind it, most companies have a smaller percent of debt than they do of equity.

566
00:55:44,160 --> 00:55:46,760
25% debt, 75% equity.

567
00:55:46,760 --> 00:55:50,880
10% debt, 90% equity.

568
00:55:50,880 --> 00:55:58,880
Only rarely will you see a company that has a larger percentage of debt than of equity.

569
00:55:58,880 --> 00:56:07,000
I mean, theoretically, you could have a company that's 100% debt, 0% equity.

570
00:56:07,000 --> 00:56:12,280
That would be a pure debt company.

571
00:56:12,280 --> 00:56:19,440
On the other hand, you do see companies that are very tiny on the debt.

572
00:56:19,440 --> 00:56:22,800
5% debt, 95% equity.

573
00:56:22,800 --> 00:56:28,840
They're just some companies that don't use debt in their capital structure very much.

574
00:56:28,840 --> 00:56:33,760
It's a bad idea because you're not achieving gains to leverage, but that's the policy of

575
00:56:33,760 --> 00:56:34,960
the company.

576
00:56:34,960 --> 00:56:37,400
So it can go both ways.

577
00:56:37,400 --> 00:56:45,120
You can have companies that are heavy debt, light equity, or light debt, heavy equity.

578
00:56:45,120 --> 00:56:47,720
Or you could have 50-50.

579
00:56:47,720 --> 00:57:10,320
But the upshot is that we are going after the weighted average cost of capital.

580
00:57:10,320 --> 00:57:13,680
This is one of those golden numbers in companies.

581
00:57:13,680 --> 00:57:21,640
The WAC, weighted average cost of capital.

582
00:57:21,640 --> 00:57:25,740
And unfortunately, it's inappropriately used.

583
00:57:25,740 --> 00:57:32,540
Companies will use WAC to discount cash flows, which it should not do.

584
00:57:32,540 --> 00:57:37,440
Companies will use WAC for other things, which it should use it for.

585
00:57:37,440 --> 00:57:42,240
But essentially, it's just the overall cost of the capital.

586
00:57:42,240 --> 00:57:43,240
Here's how you do it.

587
00:57:43,240 --> 00:57:50,760
The WAC, okay, I guess I'm just kind of doodling here on the board.

588
00:57:50,760 --> 00:57:52,760
So this is the WAC-a-doodle.

589
00:57:52,760 --> 00:57:57,760
Geez, I'm trying hard.

590
00:57:57,760 --> 00:58:10,480
The WAC is the weight of debt times the after-tax cost of debt plus the weight of equity times

591
00:58:10,480 --> 00:58:13,320
the cost of equity.

592
00:58:13,320 --> 00:58:22,660
Now remember that equity could be preferred and or common.

593
00:58:22,660 --> 00:58:28,240
So technically, I could write a little bit more detail by saying WAC is the weight of

594
00:58:28,240 --> 00:58:38,320
debt times the after-tax cost of debt plus the weight of preferred times the cost of

595
00:58:38,320 --> 00:58:49,120
preferred plus the weight of common, WS, times the cost of common.

596
00:58:49,120 --> 00:58:56,960
Just to granularize it if the company has preferred stock.

597
00:58:56,960 --> 00:59:00,040
But one way or the other, that's the WAC.

598
00:59:00,040 --> 00:59:10,560
And there is a really sweet routine for calculating this very rapidly in Excel.

599
00:59:10,560 --> 00:59:15,120
I mean, if you do it by hand, it'll take you quite a while.

600
00:59:15,120 --> 00:59:21,400
Even if you do it in Excel, by what you would think is a normal way to do it in Excel, it

601
00:59:21,400 --> 00:59:23,220
still takes a while.

602
00:59:23,220 --> 00:59:32,300
But Excel has a nice little trick for calculating weights really fast and then multiplying the

603
00:59:32,300 --> 00:59:36,840
weights times the costs just in the blink of an eye.

604
00:59:36,840 --> 00:59:38,440
It's just amazing.

605
00:59:38,440 --> 00:59:44,520
I've used this before, but unfortunately, my version of Excel that I have at my flat

606
00:59:44,520 --> 00:59:46,120
just doesn't want to do it.

607
00:59:46,120 --> 00:59:47,800
It just keeps bitching at me about it.

608
00:59:47,800 --> 00:59:49,160
I don't know why.

609
00:59:49,160 --> 00:59:55,120
But here on this computer and on your laptops, if you've got Office 365 loaded, it does it

610
00:59:55,120 --> 00:59:56,760
in the blink of an eye.

611
00:59:56,760 --> 01:00:00,080
It's just a really, really gorgeous thing.

612
01:00:00,080 --> 01:00:01,080
Let me show you.

613
01:00:01,080 --> 01:00:07,360
I'm just going to show you a quick dirty example of it.

614
01:00:07,360 --> 01:00:11,600
Let's say you've got, oh, first things first.

615
01:00:11,600 --> 01:00:16,520
I'm going to show you a nice little trick.

616
01:00:16,520 --> 01:00:21,760
Right click on your sheet, view code.

617
01:00:21,760 --> 01:00:27,520
When you see general, click on worksheet.

618
01:00:27,520 --> 01:00:32,720
Now I'm going to write a little tiny snippet of VBA just in case you get a sense of it.

619
01:00:32,720 --> 01:00:37,200
If you're taking that, if you start taking that Wall Street Prep Excel crash course,

620
01:00:37,200 --> 01:00:38,200
you'll see this.

621
01:00:38,200 --> 01:00:54,640
I'm going to write cells.entire column, try that again, column.autofit.

622
01:00:54,640 --> 01:01:02,800
Did I do that right?

623
01:01:02,800 --> 01:01:05,800
My eyes are shot right now.

624
01:01:05,800 --> 01:01:08,000
Now close out that.

625
01:01:08,000 --> 01:01:09,760
Let's do some things.

626
01:01:09,760 --> 01:01:11,960
First of all, the component.

627
01:01:11,960 --> 01:01:17,360
Did you see what it did?

628
01:01:17,360 --> 01:01:21,160
It'll automatically, watch, watch again.

629
01:01:21,160 --> 01:01:28,240
The dollar value, watch.

630
01:01:28,240 --> 01:01:31,240
Do you see what it's doing?

631
01:01:31,240 --> 01:01:34,360
It's automatically adjusting column widths.

632
01:01:34,360 --> 01:01:37,760
It doesn't do that unless you type that little snippet of VBA code.

633
01:01:37,760 --> 01:01:43,720
I don't know why they don't make that just part of Excel, but they don't.

634
01:01:43,720 --> 01:01:54,680
Now wait.

635
01:01:54,680 --> 01:01:56,840
So let's say debt.

636
01:01:56,840 --> 01:02:01,440
I'm just going to throw some numbers in here.

637
01:02:01,440 --> 01:02:05,160
Preferred, common.

638
01:02:05,160 --> 01:02:07,840
Let's take the debt.

639
01:02:07,840 --> 01:02:17,240
Let's say that there's $12 million in debt.

640
01:02:17,240 --> 01:02:23,480
Let's say the preferred is $2 million.

641
01:02:23,480 --> 01:02:28,640
Really?

642
01:02:28,640 --> 01:02:38,640
Now let's say that the equity is $28 million.

643
01:02:38,640 --> 01:02:48,160
Now the old way to do it would be to add these up and then take each one, like $12 million,

644
01:02:48,160 --> 01:02:49,720
divided by the sum.

645
01:02:49,720 --> 01:02:52,200
$2 million divided by the sum.

646
01:02:52,200 --> 01:02:55,680
$28 million divided by the sum to get the weight.

647
01:02:55,680 --> 01:02:58,600
But there's a faster way.

648
01:02:58,600 --> 01:03:00,400
Watch how I do this.

649
01:03:00,400 --> 01:03:03,480
I'm going to highlight that column.

650
01:03:03,480 --> 01:03:07,800
Now you see that little icon that just popped up there?

651
01:03:07,800 --> 01:03:09,520
That's in analytics.

652
01:03:09,520 --> 01:03:11,960
Click on it.

653
01:03:11,960 --> 01:03:19,240
Now find the totals and skid over percent of totals.

654
01:03:19,240 --> 01:03:20,480
Well spank me Jesus.

655
01:03:20,480 --> 01:03:22,160
Look at that.

656
01:03:22,160 --> 01:03:25,360
You got your weights.

657
01:03:25,360 --> 01:03:27,800
Now yes.

658
01:03:27,800 --> 01:03:30,000
Got it?

659
01:03:30,000 --> 01:03:31,000
That's a very cool thing.

660
01:03:31,000 --> 01:03:32,240
Now watch this one.

661
01:03:32,240 --> 01:03:33,240
We're going to get the whack.

662
01:03:33,240 --> 01:03:36,320
You ready for the whack?

663
01:03:36,320 --> 01:04:00,080
Whack equals some product of this column by that column.

664
01:04:00,080 --> 01:04:02,640
I forgot to put in the cost.

665
01:04:02,640 --> 01:04:03,640
God.

666
01:04:03,640 --> 01:04:09,400
The cost of capital, sorry about that cost.

667
01:04:09,400 --> 01:04:14,240
Let's say that the cost of debt is 5.8%.

668
01:04:14,240 --> 01:04:16,000
I was getting ahead of myself.

669
01:04:16,000 --> 01:04:24,120
The cost of preferred is 7.25%.

670
01:04:24,120 --> 01:04:33,720
And the cost of common stock is 14.66%.

671
01:04:33,720 --> 01:04:40,440
Now I can get the whack.

672
01:04:40,440 --> 01:04:45,560
Merge and center and then left flush.

673
01:04:45,560 --> 01:04:47,640
Now equals some product.

674
01:04:47,640 --> 01:04:50,640
I knew I was doing too good there.

675
01:04:50,640 --> 01:05:02,080
Some product of the weights, by the costs.

676
01:05:02,080 --> 01:05:11,240
So this company's weighted average cost of capital is 11.78%.

677
01:05:11,240 --> 01:05:15,960
I used to spend about a half an hour just doing this part.

678
01:05:15,960 --> 01:05:20,840
And now it's just a couple of stupid pet tricks and you're there.

679
01:05:20,840 --> 01:05:22,820
I'll do this again tomorrow.

680
01:05:22,820 --> 01:05:26,040
You notice that little trick right there with this.

681
01:05:26,040 --> 01:05:31,280
When you highlight an array, that icon pops up.

682
01:05:31,280 --> 01:05:33,360
Look at all the different things.

683
01:05:33,360 --> 01:05:34,360
You can do charts.

684
01:05:34,360 --> 01:05:38,280
You can do totals, tables.

685
01:05:38,280 --> 01:05:42,280
There's where you do your spark lines.

686
01:05:42,280 --> 01:05:46,240
It's all that is in that little box right there.

687
01:05:46,240 --> 01:05:49,360
But for us, there you go.

688
01:05:49,360 --> 01:05:51,200
That's how you can get the weighted average cost of capital.

689
01:05:51,200 --> 01:05:55,640
We'll just do it again next time on Wednesday and I'll build a model so that you can take

690
01:05:55,640 --> 01:05:56,640
home a template.

691
01:05:56,640 --> 01:05:57,640
That's all I have for you today.

692
01:05:57,640 --> 01:05:58,640
I thank you.

693
01:05:58,640 --> 01:06:14,200
I'll see you tomorrow.