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Cost of Capital and Valuation

Cost of Capital and Valuation. Discount, Variety Store - Costco Aileen Huang. Beta. Regression 60 months to 2/3/2014 R mkt : S&P 500 Omit risk free rate of return Beta: 0.57. Beta from outside sources Google 0.58 S &P 0.59 Nasdaq 0.87 Msn 0.57 Reuters 0.58 Yahoo 0.46

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Cost of Capital and Valuation

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  1. Cost of Capital and Valuation Discount, Variety Store - Costco Aileen Huang

  2. Beta • Regression • 60 months to 2/3/2014 • Rmkt: S&P 500 • Omit risk free rate of return • Beta: 0.57 • Beta from outside sources • Google 0.58 • S&P 0.59 • Nasdaq0.87 • Msn 0.57 • Reuters 0.58 • Yahoo 0.46 • Scottrade 0.6 • Tdameritrade0.6 • Firsttrade0.45 • Cnbc0.58 • Zacks0.58 • ValueLine0.75 • AVERAGE beta: 0.6

  3. Cost of Debt • FEAT/NFL • FEAT $35M • AVG NFL -$646M • Cost of debt -5.42% • Interest expense/interest bearing debt • Interest expense $99M • Avg Interest bearing liabilities $3,305M • Cost of debt 3.00% • Cost of debt after tax 1.89% • Debt rating (Upper Medium Grade) • Issuer Credit Rating (Foreign Currency LT) A+ • Issuer Credit Rating (Local Currency LT) A+ • Unable to find interest rate • 2012 NFA • Excess cash • Unlikely in the future • Choose interest expense/debt • Unable to find interest rate of senior notes and promissory notes • Short-term and long-term debt

  4. Enterprise Value and Debt Value • Market Cap • Share price: $114.99 (Yesterday) • # shares: 439.72M • $50,563M • 98.57% • NFL • $732M • 1.43%

  5. Cost of Enterprise Capital • Rf: 5% • Rmkt: 9.2% • S&P 500 20 year annualized rate of return • Req= Rf + β (Rmkt-Rf) • Rent=(Rd*% debt)+(Req*%equity) • Bloomberg • Not confident in RmktRfestimate • Regression result: historical based • Beta from outside sources • Rent=7.45% • Beta from regression • Rent=7.32% • Bloomberg • Rent=9.4%

  6. DCF Model-CAPM from Bloomberg • Enterprise value: $49,831 • CAPM: 9.6% • Growth rate • 2013-2018: 5.6% • 2019-2023: 2% • Perpetual: 2%

  7. Sensitivity Analysis • Beta from regression • Beta from outside sources • Change assumption of RmktRf

  8. CAPM from Regression • Enterprise value: $49,831 • CAPM: 7.32% • Growth rate • 2013-2018: 5.6% • 2019-2023: 2% • Perpetual: 2%

  9. CAPM from Outside Sources • Enterprise value: $49,831 • CAPM: 7.45% • Growth rate • 2013-2018: 5.6% • 2019-2023: 2% • Perpetual: 2%

  10. Change assumptions • Enterprise value: $49,831 • CAPM: 5.98% • S&P 10 year annualized return:7.4% • Risk free:4% • Growth rate • 2013-2018: 5.6% • 2019-2023: 2% • Perpetual: 2%

  11. Problems • Reqmost sensitive • Req= Rf+ β (Rmkt-Rf) • Hard to collect accurate data • β historical based

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