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The Illinois 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 weighted average cost of capital.

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Give me a minute here.

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The one minor announcement.

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I will have a quiz, a pop quiz for you next Wednesday, a week from today.

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And that should cover this topic and a little bit of what we did in the previous week.

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And this is kind of a math thing, but like I said, I'm going to build a template here with you just so you can get this down more quickly.

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It's not all that hard, any given step, but there are a number of steps in it.

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And the use of a template sort of clarifies how the steps go.

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Of course, it will do the calculations too, but like I said, the calculations themselves aren't that hard.

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It's just this doing this thing can wear you out.

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But first, I'll look at the numbers, and the numbers are there.

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And it was a bold day.

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It wasn't a spectacular bold day, but it was a solid bold day.

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You had the Dow up about 0.4%, and then the S&P 500 cranked up 0.65% and the NASDAQ, of course.

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It's back to the typical kind of day.

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NASDAQ up almost a full percent, not quite a full percent.

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But I'm just curious about something here real quick.

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Oh, well, I'll be darned.

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Anyway, so decent day, and a lot of that is being driven by the Fed still holding the line on raising interest rates.

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Very reasonably good economic conditions and all that.

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Crude has actually punched through its lower resistance level of 82, and it's down there at 80.

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Am I looking at that right? $80.67 on the light sweet Brent benchmark.

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So, I mean, yeah, we probably will see lower gas prices, but maybe it won't be too much.

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Here's the thing is if you look at the gas stations, the ones that sell both gasoline and diesel,

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you'll see the diesel prices are almost a dollar more a gallon,

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which would indicate that the supply of diesel right now is not that good.

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And so obviously in production, you have there's a tradeoff between production of gasoline and production of distillates, distillates like diesel and jet fuel and all that.

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So if the price of diesel is that high right now, there might be more allocation of fuel of oil coming in to the production of the diesel, if possible,

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whether or not that feasible or not is another thing.

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So we might not see gas prices go down that much.

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But I would imagine that by this weekend, if these prices hold where they are,

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we could see gasoline prices down maybe 3.19 a gallon.

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But we'll see how that goes. I have a feeling it will get there.

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I'm already seeing some movement on gasoline prices down this morning.

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OK, moving over here, the 10 year bond, the yields are sliding, which as you can see, which means the price is going up.

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Investors are going to buy.

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The yields are easing up because of the reality that the Fed isn't going to raise interest rates.

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And so you're beginning to see interest rates in general, not just the yields on the treasuries, but interest rates in general beginning to slide a little bit.

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There was a report yesterday that home mortgage loan rates are on the way down, which is great news.

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And that's going to stimulate the economy, spur growth.

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So we have some good signs for not just now the economy is good, but the economy will be good going into the new year.

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Which is good, as I said, good news for you folks looking for jobs.

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Now, as far as the euro and the pound, they have, and the yen too, they're all depreciating.

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If I, yeah, the yen, they're all depreciating against the dollar.

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They were appreciating, but now they're coming back down.

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And you see the euro coming down toward the bottom end of its trading, the current trading range.

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It's now below $1.05 to the euro.

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Strong dollar, strong American economy, strong dollar, all that stuff.

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Gold, yeah, it's just kind of, it came back down below $2,000 an ounce.

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It probed the resistance at $2,000, and then the traders chickened out and got it back down below, and drove it back down below that.

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So that's good news for normal people.

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Now, if you look over at Japan, there was a spike at the bell, it just jumped up, and then it stayed there.

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So that would mean that before trading began in Japan last night, last night, our time, there was good news.

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It got pushed into the prices right away, but there was no more good news.

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So the Nikkei 225 just eased along for the rest of the day, their day.

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And then come into London, and London had a drop off, and then it had a bull surge, and then a bear surge.

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It was all over the place. Kind of hard to tell what that's all about.

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I haven't been following their news too much lately, but anyway, on our side of the Pacific, another good day, a bull day.

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So when you have a spokesman come in here and tell you that it's a bull market, even if the bears try to stop them, the bull is just going to keep going.

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And to quote a famous bull, that's no bull.

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Where am I? Oh, okay. Good enough.

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Now, down to the subject of the day here. I'm going to write some equations on the board here.

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I'm going to find a marker that's going to have some punch to it.

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The weighted average cost of capital, the WAC.

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Again, very big stuff for use by businesses for a number of purposes.

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And we can do it this way.

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The weighted average cost of capital is equal to the weight of debt times the after-tax cost of debt plus the weight of equity times the cost of equity.

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Now, we can break that down a little more. The weight of equity can be broken down to the weight of preferred stock times the cost of preferred stock plus the weight of common stock,

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which I'll put as an S, times the cost of common stock.

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I showed you the three components, how you get them.

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The cost of debt after taxes is going to be the cost of debt times 1 minus the tax rate, which is uniformly right now 0.21%.

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If I'm not mistaken, your book is still using 0.35% or 0.39%, which justifiably we had it there for so long.

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And then that massive tax cut on the top income earners in corporate America just changed that 0.39 or 0.35 to 0.21 for everybody.

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Now, remember that the cost of debt, you're probably going to want to use the yield to maturity, the YTM, not the coupon.

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The coupon is a historical cost, but the market is pricing the debt from day to day, which prices the yield to maturity by the math of it, that bond calculation.

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That's going to come into play here, so we're going to have to use that at some point today, unfortunately.

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And then the cost of preferred stock is going to be the dividend that's paid on the preferred divided by the current price of the preferred stock.

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That was what I did on Monday. Nothing hard there. I mean, it's just push in some silly numbers and you're all done with it.

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The one that's a pain in the butt is this one, the cost of common stock. If it's an old company, all you do is you take the dividend one period out divided by the current price of common stock plus the gross.

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Plus the growth rate, where the dividend one period out is the current dividend times one plus the growth rate.

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Now, you see that these are actually, this is calling for an Excel sheet where you can just put in the raw data and it'll punch out the numbers quite well.

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The problem is that if you don't have a constant growth rate of dividends, the next place you go is to the capital asset pricing model.

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You take the risk-free rate plus the beta of the stock times expected return to the market portfolio minus the risk-free rate to get it.

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Quick, dirty way to have a beta.

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Then there was this third way, that's A, that's B, and there was a third way to say that the cost of equity, cost of common stock would be the current bond price, yield to maturity,

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the industry bond price, I'll put it as BP, for the industry plus the current yield to maturity, I'm sorry, plus the equity premium of the industry.

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You can do it that way.

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Now, I'm going to tell you right now that doing this on a test, I wouldn't make it so that you had to figure out which of those three you would use.

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What I will do is I will make it so that the first one is the one that you would use.

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I mean, it's bad enough when you've got a long word problem and then there's an ambiguity.

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You have to figure out, okay, did he give us a constant growth stock or did he give us a beta or did he give us an equity premium?

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That makes it even worse and it's not worth the effort to test that at this level.

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Now, if you take my next course, yeah, and I'm sure most of you are saying I can't wait to take that next course or not, probably not, it's more like it.

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Okay, now, here's what I'm going to do. Let me, actually, here is, I'm going to show you a template real quick and then I'm going to back down from that and rebuild it somewhat.

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There's a problem with all of this. How in the hell do we get these weights?

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Those would be market weights, the weight of each one. The WD, weight of debt, plus the weight of preferred, plus the weight of the common stock, should equal 1.00.

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That's what they should, they should equal 1.00. Okay.

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So, the weight of debt would be the market value of debt over total market value.

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The weight of the preferred would be the market value of the preferred over the total market value.

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And the weight of the common stock would be the market value of the common stock over the total market value.

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Now, let me show you what I mean by that.

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Oops, sorry. Okay, here. I put the market values in here. And I'm glad the new stock is a little bit complicated here.

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I might just pull that out for the time being. But, where would the market value of the debt come from?

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Well, the market value of it, you would take your total, the prices of your debt out there in the market times the amount of it.

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So, I'll get to that in a minute.

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Well, preferred stock, you take the price of the preferred stock times the number of preferred shares outstanding.

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For the common stock, you take the number of shares of common stock outstanding times the price per share, which is what we call the market cap.

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So, what that tells us, what we're doing here, what it tells us is we've got to get these market values.

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Okay, fair enough. I'm tempted to just kind of pull out this market value.

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Well, no. Let me do another sheet here and just work it through. I'll do another sheet here in a minute.

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Okay. Market value of debt.

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In real practice, this can be a total pain in the backside, simply because a company could have different debt out there.

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Some seniors, no senior subordinated and all that. You have to take how many of those bonds are out there times their price per bond.

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So, let's make it simple. Let's say you have 1,500,000 bonds outstanding.

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The price right now on those bonds is, let's say, $987.50.

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So, the market value of debt would just be the 1,500,000 of those bonds we have outstanding times the price per bond, per each one of them, $987.50.

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If I do that real quick here. Calculator. I take 1,500,000 bonds.

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These are the actual bonds themselves times the price of each one of those in the market right now. That would be $1.481 billion.

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That would be the market value of its bonds.

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You see, if those bonds were selling at par, the market value would be $1.5 billion.

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A thousand times 1,500,000 of them. But these bonds are selling at a discount to par.

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So, their market value is a little less than $1.5 billion.

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That means that the market weight of the debt is a little lower because the bonds are selling at a discount.

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Now, if the bonds were selling at a premium, then the market value of the bonds would be above $1.5 billion.

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But the bottom line is, you need to know how many of the bonds are out there and what the price of the bonds is.

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But that's also one of the, you also need to know the price of the bonds.

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That's one of the things to find the yield to maturity on the bonds too. So, it's a double problem there.

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You just have to walk your way through the pieces and that's why it's nice to be able to put the problem into a table.

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And then get it done. Let me try something here.

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Okay, now the preferred stock.

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The market value of the preferred.

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Getting a little low on this board here.

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That would be just the price per share of the preferred times the number of preferred shares outstanding.

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That would be the market value of them.

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Suppose the company has, let's say, 500,000 shares of preferred stock.

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And the price per share of the preferred right now is, let's say, $85.

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Well, then the market value, and I am getting low on here. I'll read this to you.

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Market value of preferred would be nothing but 500,000 shares times a market price right now of $85 per share.

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I'm not even going to try it. I'm just going to do it on the calculator.

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500,000 times, what was I thinking here, times $85 per share.

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42,500,000.

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Let me get over here so I can do this a little easier, a little more easily.

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This is truly a pain.

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So I've got the market value, the market value of debt, the market value of preferred,

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and the market value of the debt was, what was that, 1.48125.

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$1,481,000,000.

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Market value of the preferred was $42,500,000.

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And now the cost of the market value of the common.

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Let's say that there are 50 million shares of common stock outstanding.

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Let's say that the price per share right now, price of the common stock right now is $120 per share.

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So the market value of the common would be 50 million shares of it out there at $120 per share.

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And again, I'm not even going to try that. 50 million shares of stock outstanding.

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Times $120 per share, $6 billion.

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Market value of common.

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There you go.

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And finally, I'm going to do this on the calculator the first time.

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And then we're going to use Excel to do it and automate this pain in the butt.

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The total market value of all of its securities would be the $1,481,250,000

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plus the $42,500,000 plus the $6 billion.

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My ass.

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Let's try that again. $1 billion. Thank you.

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$1,481,250,000 plus, try it again, $4,500,000 plus $6,000,000.

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Did I do it that time? Ha!

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And you can see this is where Excel really begins to help you out a lot with this.

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$7523,750,000, $7523,750,000.

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That is the total.

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Now you can see, I hope you see how Excel is going to accelerate this process.

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So the weight of debt is the $1,481,250,000 divided by the $7,523,750.

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The weight of preferred would be the $42,500,000 divided by the total $7523,750,000.

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And the weight of common stock would be $6 billion divided by $7,523,750,000.

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I'm almost losing my will to live doing it this way.

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Not fun.

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Okay, so.

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I'm going to do it on the calculator.

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I'm going to be a little lazy here.

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I'm going to save the total in memory.

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So now the first one.

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The first one would be $1481,250,000 divided by that monster total, memory recall, $7.5 billion.

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So the weight of debt is.1969.

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The weight of equity of, I'm sorry, that's the weight of debt, the weight of preferred would be the $42,500,000 divided by that $7.5 billion, memory recall.

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And you get.006, the very small part of the capital structure of the company.

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.0056.

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And then the weight of equity would be $6 billion divided by that $7.5 billion, or would be.7975.

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.7975.

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And if you add those up, those will come, those weights will come up to exactly one.

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Now you're going to get maybe a little tiny bit of rounding error, and obviously I give account for that in looking for the correct answer.

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But there is how you get the weights, using a calculator.

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But we can do a little bit of that.

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So what I'm going to do is I'm going to build another sheet here, over here, make it bigger.

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Now the one that I have already prepared includes new common stock, which I haven't shown you yet.

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And I'm probably not going to do that, well, let me not be vague.

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I will not do that on a test.

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So all you'll be doing is the security type, and then the cost, and then the market value.

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And then the weight.

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Oh, I have to put in the, how did I do it on the other one?

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00:33:45,000 --> 00:33:53,000
Yeah, the market value, market value, and then I put in the weight.

199
00:33:53,000 --> 00:34:07,000
Yeah, the weight.

200
00:34:07,000 --> 00:34:17,000
Get those in.

201
00:34:17,000 --> 00:34:21,000
I'm going to take a quick side jump here.

202
00:34:21,000 --> 00:34:28,000
You don't have to know this, obviously, it's just something that avoids an annoyance of mine.

203
00:34:28,000 --> 00:34:36,000
Right click on the sheet you're working on, view code.

204
00:34:36,000 --> 00:34:42,000
See that general, do the worksheet.

205
00:34:42,000 --> 00:34:47,000
And I'm going to type in a single line of VBA.

206
00:34:47,000 --> 00:34:52,000
Cells.EntireColumn.

207
00:34:52,000 --> 00:34:54,000
We can't see this.

208
00:34:54,000 --> 00:35:00,000
Really? Oh.

209
00:35:00,000 --> 00:35:01,000
Now?

210
00:35:01,000 --> 00:35:03,000
Yes.

211
00:35:03,000 --> 00:35:11,000
Oh well, that helped a whole hell of a lot.

212
00:35:11,000 --> 00:35:16,000
Will you let me put it here so I can, okay, let me do it again.

213
00:35:16,000 --> 00:35:19,000
I'm just showing you a stupid pet trick.

214
00:35:19,000 --> 00:35:26,000
Cells, it'll make you feel like you're really cool because you can write VBA.

215
00:35:26,000 --> 00:35:31,000
Cells.EntireColumn.

216
00:35:31,000 --> 00:35:34,000
See, it's even offering it to you if you want.

217
00:35:34,000 --> 00:35:39,000
.autofit.

218
00:35:39,000 --> 00:35:42,000
Whoops,.autofit.

219
00:35:42,000 --> 00:35:48,000
.autofit.

220
00:35:48,000 --> 00:35:53,000
Okay, let me just get rid of it.

221
00:35:53,000 --> 00:35:57,000
Now watch what happens when I hit enter.

222
00:35:57,000 --> 00:36:00,000
Did you see what happened?

223
00:36:00,000 --> 00:36:09,000
I don't know why Excel never put this VBA and embedded it, but you'll catch it as I go along.

224
00:36:09,000 --> 00:36:16,000
So we're going to have debt preferred.

225
00:36:16,000 --> 00:36:19,000
Did you see what happened there?

226
00:36:19,000 --> 00:36:29,000
Common.

227
00:36:29,000 --> 00:36:36,000
Now let's just throw in those numbers and throw in a cost.

228
00:36:36,000 --> 00:36:46,000
Okay, so the after-tax cost of debt, let's say, is 4.25%.

229
00:36:46,000 --> 00:36:49,000
Oops.

230
00:36:49,000 --> 00:36:56,000
4.25%.

231
00:36:56,000 --> 00:37:07,000
So the cost of preferred stock is, let's say, 5.80%.

232
00:37:07,000 --> 00:37:19,000
And the cost of common equity is 12.63%.

233
00:37:19,000 --> 00:37:21,000
Now let's put in the market values.

234
00:37:21,000 --> 00:37:24,000
Just the ones that I got there.

235
00:37:24,000 --> 00:37:27,000
What did I have?

236
00:37:27,000 --> 00:37:33,000
1481

237
00:37:33,000 --> 00:37:37,000
81

238
00:37:37,000 --> 00:37:40,000
250

239
00:37:40,000 --> 00:37:45,000
000

240
00:37:45,000 --> 00:37:57,000
The preferred was 42,500,000.

241
00:37:57,000 --> 00:38:05,000
And I wanted to put a dollar sign on that.

242
00:38:05,000 --> 00:38:22,000
The cost of common stock, rather the market value of the common stock was $6 billion.

243
00:38:22,000 --> 00:38:25,000
Okay.

244
00:38:25,000 --> 00:38:31,000
Now

245
00:38:31,000 --> 00:38:39,000
I add those up and I get that $7.5 billion.

246
00:38:39,000 --> 00:38:41,000
Oh.

247
00:38:41,000 --> 00:38:43,000
Yeah, I know, yes.

248
00:38:43,000 --> 00:38:48,000
You wait until I make a fool of myself to tell you, right?

249
00:38:48,000 --> 00:38:50,000
There you go.

250
00:38:50,000 --> 00:38:58,000
And then each of those would be equal to, for example, the market value of debt

251
00:38:58,000 --> 00:39:01,000
divided by the total.

252
00:39:01,000 --> 00:39:12,000
And I'm going to make that an absolute reference so I can just scope it down.

253
00:39:12,000 --> 00:39:18,000
And you get the same numbers I did over there.

254
00:39:18,000 --> 00:39:25,000
I want you to catch up with me because I'm going to show you a faster way to do it.

255
00:39:25,000 --> 00:39:30,000
I think I showed you last time, but I'll show you for sure this time.

256
00:39:30,000 --> 00:39:35,000
So first you get the market values in each one.

257
00:39:35,000 --> 00:39:37,000
You add them up.

258
00:39:37,000 --> 00:39:40,000
Then you take each market value divided by the total.

259
00:39:40,000 --> 00:39:54,000
That's how you get a weight.

260
00:39:54,000 --> 00:39:56,000
Okay.

261
00:39:56,000 --> 00:39:59,000
Are you ready for a stupid pet trick?

262
00:39:59,000 --> 00:40:00,000
Watch this.

263
00:40:00,000 --> 00:40:02,000
I'm going to get rid of that.

264
00:40:02,000 --> 00:40:06,000
I'm going to get rid of that.

265
00:40:06,000 --> 00:40:10,000
If you want to follow with me, I'll stop at each step.

266
00:40:10,000 --> 00:40:15,000
You highlight the three market values.

267
00:40:15,000 --> 00:40:27,000
When you do that, you're going to see a little icon down in the lower left side of the highlight.

268
00:40:27,000 --> 00:40:29,000
Got it?

269
00:40:29,000 --> 00:40:33,000
Click on it.

270
00:40:33,000 --> 00:40:36,000
Choose totals.

271
00:40:36,000 --> 00:40:44,000
And scoot clear over to the end and you'll see a percent total with a yellow column.

272
00:40:44,000 --> 00:40:50,000
That's saying find the percents and put them in the next column.

273
00:40:50,000 --> 00:40:52,000
Did you see it?

274
00:40:52,000 --> 00:40:54,000
It's even flashing it.

275
00:40:54,000 --> 00:40:57,000
And if I click on it, it will make it permanent.

276
00:40:57,000 --> 00:40:59,000
Well, spank me, Jesus.

277
00:40:59,000 --> 00:41:02,000
Look at that.

278
00:41:02,000 --> 00:41:04,000
There's a lot you can do.

279
00:41:04,000 --> 00:41:06,000
If you look at that icon, just play with it.

280
00:41:06,000 --> 00:41:08,000
You can do charts from it.

281
00:41:08,000 --> 00:41:10,000
You can do averages.

282
00:41:10,000 --> 00:41:12,000
A lot of different things.

283
00:41:12,000 --> 00:41:29,000
You can either do them underneath or you can do them as a side column.

284
00:41:29,000 --> 00:41:33,000
And now, ladies and gentlemen, for the end.

285
00:41:33,000 --> 00:41:39,000
Whack.

286
00:41:39,000 --> 00:41:47,000
I want to take cost of debt times the weight of debt plus the cost of preferred times the weight of preferred

287
00:41:47,000 --> 00:41:54,000
plus the cost of common times the weight of common.

288
00:41:54,000 --> 00:41:56,000
And I'm going to do a sum product.

289
00:41:56,000 --> 00:42:00,000
Equals sum product.

290
00:42:00,000 --> 00:42:02,000
Open the parentheses.

291
00:42:02,000 --> 00:42:12,000
You say do this column, cost column, comma, this column, the weight column.

292
00:42:12,000 --> 00:42:24,000
So the weighted average cost of capital for this firm is 10.94%.

293
00:42:24,000 --> 00:42:25,000
Yes?

294
00:42:25,000 --> 00:42:27,000
Yeah.

295
00:42:27,000 --> 00:42:31,000
Is getting that weight percentage the only way by doing that by highlighting market value

296
00:42:31,000 --> 00:42:34,000
or is there another way to get to that?

297
00:42:34,000 --> 00:42:38,000
To the final weighted average cost of capital.

298
00:42:38,000 --> 00:42:42,000
Is the shortcut that you're showing us right now, is us highlighting those three cells

299
00:42:42,000 --> 00:42:44,000
the only way to get to quick analysis or is there another way to get to that?

300
00:42:44,000 --> 00:42:46,000
There's another way I can show you.

301
00:42:46,000 --> 00:42:47,000
Hang on.

302
00:42:47,000 --> 00:42:48,000
I can take.

303
00:42:48,000 --> 00:42:50,000
You don't have that icon that you're showing us.

304
00:42:50,000 --> 00:42:51,000
You don't?

305
00:42:51,000 --> 00:42:53,000
Apple.

306
00:42:53,000 --> 00:42:55,000
Yeah.

307
00:42:55,000 --> 00:42:59,000
I'm sorry, I forgot.

308
00:42:59,000 --> 00:43:08,000
Okay, so I take equals this times this.

309
00:43:08,000 --> 00:43:09,000
You're not understanding my question.

310
00:43:09,000 --> 00:43:12,000
So I don't have the weight 19.69%.

311
00:43:12,000 --> 00:43:13,000
You don't have those?

312
00:43:13,000 --> 00:43:15,000
Because, so I did from dividing.

313
00:43:15,000 --> 00:43:16,000
Oh, you didn't.

314
00:43:16,000 --> 00:43:17,000
It's the same weights, isn't it?

315
00:43:17,000 --> 00:43:18,000
Yeah.

316
00:43:18,000 --> 00:43:36,000
So I'm just going to take this times this plus this times this plus this times this.

317
00:43:36,000 --> 00:43:39,000
Should give me the same number.

318
00:43:39,000 --> 00:43:40,000
Yep.

319
00:43:40,000 --> 00:43:41,000
Is that the same stock product?

320
00:43:41,000 --> 00:43:42,000
Yeah.

321
00:43:42,000 --> 00:43:47,000
That's doing, that's the sum product does that for you.

322
00:43:47,000 --> 00:43:50,000
It works hard so we don't have to.

323
00:43:50,000 --> 00:43:51,000
Sum product does.

324
00:43:51,000 --> 00:43:54,000
It's exactly the same thing.

325
00:43:54,000 --> 00:44:00,000
Now, I've been finding out that sum product does some really weird stuff that's more advanced

326
00:44:00,000 --> 00:44:01,000
too.

327
00:44:01,000 --> 00:44:08,000
So use it cautiously because it's apparently a rather more powerful tool than I normally

328
00:44:08,000 --> 00:44:09,000
use it for.

329
00:44:09,000 --> 00:44:12,000
But the sum product is just really nice.

330
00:44:12,000 --> 00:44:20,000
Especially, imagine if you had like 10 rows, you would be doing this times this plus this

331
00:44:20,000 --> 00:44:21,000
times this.

332
00:44:21,000 --> 00:44:22,000
The sum product is wham.

333
00:44:22,000 --> 00:44:23,000
It does it in one shot.

334
00:44:23,000 --> 00:44:24,000
Yeah.

335
00:44:24,000 --> 00:44:26,000
Can you show the quick way to get the weight down?

336
00:44:26,000 --> 00:44:27,000
Yeah, sure.

337
00:44:27,000 --> 00:44:28,000
Watch.

338
00:44:28,000 --> 00:44:29,000
Just always ask me.

339
00:44:29,000 --> 00:44:30,000
Do it again, fat boy.

340
00:44:30,000 --> 00:44:31,000
Watch.

341
00:44:31,000 --> 00:44:33,000
I don't have the weight percentages on this.

342
00:44:33,000 --> 00:44:34,000
Oh, the weight percentages?

343
00:44:34,000 --> 00:44:36,000
I'm going to click a little pop up on the screen.

344
00:44:36,000 --> 00:44:37,000
Okay.

345
00:44:37,000 --> 00:44:41,000
I just, all I did was I just took, let me clear this.

346
00:44:41,000 --> 00:44:46,000
By all means, always just say stop and go back because, okay, here's what you're going

347
00:44:46,000 --> 00:44:47,000
to do.

348
00:44:47,000 --> 00:44:50,000
You're going to take equals.

349
00:44:50,000 --> 00:44:55,000
Do you know how you highlight it and then there's a little pop up to like the bottom

350
00:44:55,000 --> 00:44:56,000
right?

351
00:44:56,000 --> 00:44:57,000
Oh, yeah.

352
00:44:57,000 --> 00:44:58,000
You want that?

353
00:44:58,000 --> 00:44:59,000
Okay.

354
00:44:59,000 --> 00:45:00,000
Watch.

355
00:45:00,000 --> 00:45:01,000
This one?

356
00:45:01,000 --> 00:45:04,000
I highlight these three.

357
00:45:04,000 --> 00:45:05,000
That one?

358
00:45:05,000 --> 00:45:06,000
Is that what you want?

359
00:45:06,000 --> 00:45:07,000
Okay, watch.

360
00:45:07,000 --> 00:45:14,000
When I highlight them, this, whenever you highlight anything, that always shows up.

361
00:45:14,000 --> 00:45:15,000
And people think why?

362
00:45:15,000 --> 00:45:16,000
It does not on Mac.

363
00:45:16,000 --> 00:45:18,000
It does not on Mac.

364
00:45:18,000 --> 00:45:19,000
Yeah.

365
00:45:19,000 --> 00:45:20,000
Right?

366
00:45:20,000 --> 00:45:21,000
Okay.

367
00:45:21,000 --> 00:45:22,000
That's why.

368
00:45:22,000 --> 00:45:23,000
Yeah.

369
00:45:23,000 --> 00:45:24,000
Yeah.

370
00:45:24,000 --> 00:45:29,000
That's what, I didn't realize that Macs didn't do that trick.

371
00:45:29,000 --> 00:45:33,000
Yet another reason to trade in your Macintosh.

372
00:45:33,000 --> 00:45:37,000
Would command Q do it?

373
00:45:37,000 --> 00:45:39,000
Try, yeah, try command Q.

374
00:45:39,000 --> 00:45:43,000
So I need to try to impose my.

375
00:45:43,000 --> 00:45:48,000
I can't do it on this because it's a PC, but see if command Q will pull that.

376
00:45:48,000 --> 00:45:50,000
Q is quantitative.

377
00:45:50,000 --> 00:45:55,000
At least that's what I thought it meant.

378
00:45:55,000 --> 00:45:58,000
Let me try something here.

379
00:45:58,000 --> 00:45:59,000
Command Q.

380
00:45:59,000 --> 00:46:01,000
Hey, spank me.

381
00:46:01,000 --> 00:46:05,000
Control Q does it on the PC.

382
00:46:05,000 --> 00:46:08,000
No, on Mac it just pulls it down.

383
00:46:08,000 --> 00:46:09,000
Command Q does?

384
00:46:09,000 --> 00:46:13,000
Yeah.

385
00:46:13,000 --> 00:46:16,000
I am so disappointed.

386
00:46:16,000 --> 00:46:20,000
I have such neat tricks here.

387
00:46:20,000 --> 00:46:24,000
Trying to think what else I could do.

388
00:46:24,000 --> 00:46:26,000
Wait, let me try.

389
00:46:26,000 --> 00:46:29,000
Okay, I'm going to do something I usually don't do.

390
00:46:29,000 --> 00:46:36,000
I'm going to try to Google.

391
00:46:36,000 --> 00:46:48,000
Command Q on Mac.

392
00:46:48,000 --> 00:46:55,000
That quits it.

393
00:46:55,000 --> 00:46:56,000
Try one more thing.

394
00:46:56,000 --> 00:47:04,000
I don't want to spend too long on this, but let me try something here.

395
00:47:04,000 --> 00:47:09,000
Okay.

396
00:47:09,000 --> 00:47:11,000
Okay, let's try this.

397
00:47:11,000 --> 00:47:15,000
Let me try this.

398
00:47:15,000 --> 00:47:28,000
Let's do conditional formatting.

399
00:47:28,000 --> 00:47:38,000
On the format sidebar, click the cell tab, and then you should get conditional highlighting.

400
00:47:38,000 --> 00:47:41,000
That's where that is.

401
00:47:41,000 --> 00:47:56,000
So you would highlight the cells and then click on the format sidebar, whatever that is, and click the cell tab.

402
00:47:56,000 --> 00:48:09,000
Does that work?

403
00:48:09,000 --> 00:48:11,000
Hmm.

404
00:48:11,000 --> 00:48:25,000
Did it work?

405
00:48:25,000 --> 00:48:27,000
It did?

406
00:48:27,000 --> 00:48:32,000
Or not?

407
00:48:32,000 --> 00:48:43,000
Okay.

408
00:48:43,000 --> 00:48:57,000
Anyway, let me get these back in here.

409
00:48:57,000 --> 00:48:59,000
Okay.

410
00:48:59,000 --> 00:49:02,000
Let me kind of proceed on here.

411
00:49:02,000 --> 00:49:06,000
I kind of took the wind out of my sails pretty quickly here.

412
00:49:06,000 --> 00:49:12,000
Okay, now, the cost.

413
00:49:12,000 --> 00:49:29,000
Let's add in, and we'll go back over to my existing one here.

414
00:49:29,000 --> 00:49:46,000
On this one, let's put in now, and now I'm going to put in, we're going to get the cost.

415
00:49:46,000 --> 00:49:53,000
Now on this one, what's going to happen is we're going to need a bunch of little information.

416
00:49:53,000 --> 00:50:04,000
We're going to need the tax rate, the cost of debt, the preferred dividend, the par value,

417
00:50:04,000 --> 00:50:13,000
the price of the preferred, common dividend, and all of those other things you need to create the price

418
00:50:13,000 --> 00:50:19,000
and therefore the cost of each one.

419
00:50:19,000 --> 00:50:25,000
Now the first thing we'll need is the yield to maturity on the debt.

420
00:50:25,000 --> 00:50:27,000
There's the yield to maturity.

421
00:50:27,000 --> 00:50:31,000
That's that, calculate the yield from that other spreadsheet that I gave you.

422
00:50:31,000 --> 00:50:33,000
This is the same thing.

423
00:50:33,000 --> 00:50:36,000
It's a mini version of it.

424
00:50:36,000 --> 00:50:45,000
All you have to do is put in the term and the coupon, and remember that you have to do the price on the 100.

425
00:50:45,000 --> 00:50:55,000
And then that 100 won't be, you don't touch that, payments per year, 360-day basis, and there's your yield.

426
00:50:55,000 --> 00:51:02,000
It's the same as the one, the bond calculation that almost all of you got right on the test.

427
00:51:02,000 --> 00:51:08,000
This is just doing it again, and it gives you the yield.

428
00:51:08,000 --> 00:51:15,000
This is just taking this number and multiplying it by your tax rate.

429
00:51:15,000 --> 00:51:18,000
So you're going to leave the tax rate alone.

430
00:51:18,000 --> 00:51:29,000
And if you do, and if you calculate the bond yield to maturity, that number will just appear for you.

431
00:51:29,000 --> 00:51:38,000
The 1.92, that is the cost of preferred stock.

432
00:51:38,000 --> 00:51:40,000
Notice that it's just the formula.

433
00:51:40,000 --> 00:51:50,000
The dividend on the preferred, which you put down here, which is nothing, the dividend on the preferred is nothing but the two,

434
00:51:50,000 --> 00:51:56,000
whatever you give for the dividend, times the par value of the preferred.

435
00:51:56,000 --> 00:52:01,000
In this case, the par value was $85 per share.

436
00:52:01,000 --> 00:52:06,000
I didn't tell you the dividend, but now here we have it.

437
00:52:06,000 --> 00:52:16,000
And the current price of the preferred, I put in a price there.

438
00:52:16,000 --> 00:52:21,000
Now the common stock dividend, I'll give you that.

439
00:52:21,000 --> 00:52:29,000
You just put it in there, and then the growth rate, and that will give you D1.

440
00:52:29,000 --> 00:52:41,000
And that is just the current price, the D1.

441
00:52:41,000 --> 00:52:48,000
The common stock, its cost,

442
00:52:48,000 --> 00:52:55,000
it's just going to be D1, which is D0, times 1 plus the growth rate,

443
00:52:55,000 --> 00:53:06,000
divided by the R minus the return, plus B17.

444
00:53:06,000 --> 00:53:08,000
And this one, don't worry about it.

445
00:53:08,000 --> 00:53:12,000
I'm getting rid of, I'm not going to use it for this one.

446
00:53:12,000 --> 00:53:21,000
I'm going to put in the price of the common stock and the number of shares of the common stock outstanding.

447
00:53:21,000 --> 00:53:25,000
I wonder where I put that, oh.

448
00:53:25,000 --> 00:53:30,000
Oh, there's the rest of the information over there.

449
00:53:30,000 --> 00:53:37,000
And I'm going to shade that.

450
00:53:37,000 --> 00:53:40,000
Because you won't use it for the problems this time.

451
00:53:40,000 --> 00:53:48,000
You get the par value of the bonds, how much they are actually, price of the bonds.

452
00:53:48,000 --> 00:53:54,000
That would be the price of the bonds times, I give you the price.

453
00:53:54,000 --> 00:53:59,000
Number of preferred shares outstanding, number of common shares outstanding.

454
00:53:59,000 --> 00:54:05,000
As long as you can fill in these numbers and get the bond, calculate the yield,

455
00:54:05,000 --> 00:54:15,000
and put these numbers here, these numbers will come out.

456
00:54:15,000 --> 00:54:32,000
Matter of fact, let me remove that row entirely.

457
00:54:32,000 --> 00:54:37,000
And this one won't come out to be that one because the numbers, these numbers I put in are different.

458
00:54:37,000 --> 00:54:46,000
So in the template, all you have to do is put in this number right here.

459
00:54:46,000 --> 00:54:56,000
This number you don't have to calculate because it's done for you by the yield to maturity calculation over here.

460
00:54:56,000 --> 00:54:59,000
The preferred dividend would come from the problem.

461
00:54:59,000 --> 00:55:07,000
You give the preferred dividend, the par value of the preferred, the price of the preferred,

462
00:55:07,000 --> 00:55:12,000
and then the common stock dividend, the growth rate, and the current price.

463
00:55:12,000 --> 00:55:20,000
And I'm going to just get rid of this because we're not going to use it.

464
00:55:20,000 --> 00:55:26,000
And this all should calculate for you.

465
00:55:26,000 --> 00:55:36,000
Play around with it. It'll take a little bit to get used to it.

466
00:55:36,000 --> 00:56:02,000
And I'm going to put this one up as your save as. I'll just put it in documents.

467
00:56:02,000 --> 00:56:08,000
Now I put a macro in there and it's going to bitch at me about that macro I put in there.

468
00:56:08,000 --> 00:56:12,000
So I'm going to just, it won't be in there. It doesn't affect the problem at all.

469
00:56:12,000 --> 00:56:24,000
And then I'm going to upload this to your sheets, to your spreadsheets so that you have it for that.

470
00:56:24,000 --> 00:56:29,000
Now a little bit of background here. One last thing.

471
00:56:29,000 --> 00:56:37,000
Well, as a matter of fact, let me show you this.

472
00:56:37,000 --> 00:56:47,000
When would you need to issue common stock?

473
00:56:47,000 --> 00:56:51,000
Because you can get debt, you can get preferred, you can get common.

474
00:56:51,000 --> 00:57:04,000
When would you need to, if you had new projects, that would change your retained earnings?

475
00:57:21,000 --> 00:57:41,000
If I take the, suppose I'm going to do projects that will total, let's say, $100 million.

476
00:57:41,000 --> 00:58:04,000
$100 million. Divided by the weight of common stock, which was.7975.

477
00:58:04,000 --> 00:58:16,000
We have a need for that. The weight of the common, we're going to grow our retained earnings by $100 million.

478
00:58:16,000 --> 00:58:19,000
Because we're going to take on $100 million in new projects.

479
00:58:19,000 --> 00:58:27,000
We will finance with debt, preferred, and common stock, and our retained earnings.

480
00:58:27,000 --> 00:58:45,000
If I take the $100 million and divide that by.7975,

481
00:58:45,000 --> 00:59:14,000
then I would have to go to start using new common stock when I had reached $125,391,850.

482
00:59:14,000 --> 00:59:21,000
In total changes in retained earnings, which would include income that was brought in.

483
00:59:21,000 --> 00:59:27,000
We have a name for this. This is called the equity break point.

484
00:59:27,000 --> 00:59:46,000
It is when we reach a retained earnings total level of $125,391,850 that we would have to go out and issue more common stock.

485
00:59:46,000 --> 00:59:50,000
That's called the equity break point.

486
00:59:50,000 --> 00:59:55,000
I'll explain a little more on Monday, but I do want to show you something before I finish today.

487
00:59:55,000 --> 01:00:00,000
Let me show you one last thing.

488
01:00:00,000 --> 01:00:04,000
Don't worry too much about that right now. I'll go back through that on Monday.

489
01:00:04,000 --> 01:00:11,000
As a matter of fact, I'll go through some of this again on Monday just to make sure you've got it down well.

490
01:00:11,000 --> 01:00:16,000
I'll extend the deadline to Tuesday night on your homework too, by the way.

491
01:00:16,000 --> 01:00:22,000
I did want to show you one thing before I quit here.

492
01:00:22,000 --> 01:00:30,000
What you're seeing here, this comes from the Stern School of Business at New York University.

493
01:00:30,000 --> 01:00:40,000
Every January they take companies in lots of industries, 90-some industries,

494
01:00:40,000 --> 01:00:46,000
and they show what they calculate, just what I did here.

495
01:00:46,000 --> 01:00:58,000
The cost of equity, the weight of equity, the cost of the after-tax, the cost of the standard deviation.

496
01:00:58,000 --> 01:01:08,000
They do that. The cost of debt, the tax rate, the after-tax cost of debt, and then they do the weight of the debt.

497
01:01:08,000 --> 01:01:17,000
Here's the weight of equity times the cost of equity. Here's the weight of debt, weight of debt times the after-tax cost of debt,

498
01:01:17,000 --> 01:01:21,000
and they calculate the weighted average cost of capital.

499
01:01:21,000 --> 01:01:25,000
Now, this was fresh in January of this year.

500
01:01:25,000 --> 01:01:35,000
Now, by industry, if I shrink this down just a little more, you can see it a little better here.

501
01:01:35,000 --> 01:01:42,000
These are the weighted average cost of capital for all these different industries in the U.S.

502
01:01:42,000 --> 01:01:45,000
You notice something.

503
01:01:45,000 --> 01:01:55,000
First of all, most of the industries have weighted average cost of capital that is less than 10%.

504
01:01:55,000 --> 01:02:01,000
Only a few, like this one, the energy.

505
01:02:01,000 --> 01:02:09,000
Oddly enough, energy has a higher weighted average cost of capital than almost any other industry.

506
01:02:09,000 --> 01:02:12,000
Here's another one.

507
01:02:12,000 --> 01:02:17,000
Electrical equipment. One more.

508
01:02:17,000 --> 01:02:25,000
Health care has a high weighted average cost of capital relative to all industries.

509
01:02:25,000 --> 01:02:32,000
Looking down here, there was one more that was, well, here we have three in a row.

510
01:02:32,000 --> 01:02:41,000
Shoes, software, entertainment software, productivity software.

511
01:02:41,000 --> 01:02:45,000
They all have high weighted average cost of capital.

512
01:02:45,000 --> 01:02:58,000
But the average overall is about 9.25%. Overall is the typical weighted average cost of capital.

513
01:02:58,000 --> 01:03:05,000
Kind of gives you an idea for, if nothing else, if you're just pulling a weighted average cost of capital out of the air,

514
01:03:05,000 --> 01:03:14,000
but you want it to be kind of realistic, you probably would want to use about 9.25 for your typical weighted average cost of capital.

515
01:03:14,000 --> 01:03:21,000
Not sure what that indicates, but keeping an eye on this, interestingly,

516
01:03:21,000 --> 01:03:30,000
2022, the weighted average cost of capital was somewhat lower because interest rates went up through 2022.

517
01:03:30,000 --> 01:03:36,000
Now, it will take a few more months before we will know what they did in 2023.

518
01:03:36,000 --> 01:03:45,000
But just for a general problem, a weighted average cost of capital of 9.25 isn't a bad number to try.

519
01:03:45,000 --> 01:04:13,000
Anyway, that's all I have for you today. I thank you.