Model Choice

CHOOSING THE RIGHT VALUATION MODEL

This program is designed to help in choosing the right model to

use for any occassion.

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 Model Choice

Inputs to the model

Level of Earnings (in currency)

Are your earnings positive ? Yes (Yes or No)

If the earnings are positive and normal, please enter the following:

What is the expected inflation rate in the econ 3.50% (in percent)

What is the expected real growth rate in the e 3.00% (in percent)

What is the expected growth rate in earnings (revenues) for this 20.00% (in percent)

Does this firm have a significant and sustainable advantage ov no (Yes or No)

Differential Advantages: High growth comes from a firm earning excess returns on its projects, which in turn comes from some

possessed by the firm over its competitors. This differential advantage can be legal (as is the case with legal monopolies like telecom), o

or a strong brand name (as is the case with many consumer product firms) or economies of scale. The question that is being asked relate

the existing differential advantage but also to the future.

If the earnings are negative, please enter the following:

Are the earnings negative because the firm is in a cyclical business ? (Yes or No)

Are the earnings negative because of a one-time or temporary occurrence? (Yes or No)

Are the earnings negative because the firm has too much debt? (Yes or No)

If yes, is there a strong likelihood of bankruptcy? (Yes or No)

Are the earnings negative because the firm is just starting up? (Yes or No)

Financial Leverage

What is the current debt ratio (in market value terms) ? 0.00% (in percent)

Is this debt ratio expected to change significantly ? no (Yes or No)

Dividend Policy

What did the firm pay out as dividends in the current year? $1,200.00 (in currency)

Can you estimate capital expenditures and working capital req Yes (Yes or No)

Enter the following inputs (from the current year) for computing FCFE

Net Income (NI) $1,930.00

Depreciation and Amortization $424.00

Capital Spending (Including acquisitions) $0.00

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 Model Choice

∆ Non-cash Working Capital (∆WC) ($3,806.00)

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 Model Choice

FCFE = NI - (Capital Spending - Depreciation) *(1- Debt Ratio) - ∆ WC (1-Debt Ra $6,160.00

OUTPUT FROM THE MODEL

Based upon the inputs you have entered, the right valuation model for this firm is:

Type of Model (DCF Model, Option Pricing Model): Discounted CF Mo! If option pricing model, first do a DCF valuation

Level of Earnings to use in model (Current, Normalized): Current Earnings

Cashflows that should be discounted (Dividends, FCFE, FCFF)FCFE (Value equity)

Length of Growth Period (10 or more, 5 to 10, less than 5) 5 to 10 years

Appropriate Growth Pattern (Stable, 2 stage, 3 stage): Three-stage Growt! In an n-stage model, you will estimate target opera

or net margins (if valuing equity) and revenue growt

Beta Calculation

Gordon Growth Model

Two-Stage Dividend Discount Model

Three-Stage Dividend Discount Model

FCFF Stable Growth Model

Two-Stage FCFF Discount Model

Three-Stage FCFF Discount Model

FCFE Stable Growth Model

Two-Stage FCFE Discount Model

Three-Stage FCFE Discount Model

Price/Book Value Mulitiples

Two-Stage Price/Book Value Mulitiples

Rating Estimator

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 Model Choice

ODEL

odel to

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 Model Choice

which in turn comes from some differential advantage

h legal monopolies like telecom), or technological,

question that is being asked relates not just to

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 Model Choice

g model, first do a DCF valuation

odel, you will estimate target operating margins (if valuing the firm)

valuing equity) and revenue growth each year.

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 Beta Calculation

Time series Price ê Price VN Index ê VN Index Alpha

0 2.90 9,003.8
1 2.83 -0.0241 9,119.7 0.0129 -0.0315
2 2.80 -0.0106 8,872.9 -0.0271 0.0049
3 2.72 -0.0286 8,999.1 0.0142 -0.0367
4 2.75 0.0110 9,132.0 0.0148 0.0026
5 2.55 -0.0727 8,749.8 -0.0419 -0.0488
6 2.47 -0.0314 8,933.7 0.0210 -0.0434
7 2.54 0.0283 9,008.8 0.0084 0.0235
8 2.47 -0.0276 8,906.2 -0.0114 -0.0211
9 2.40 -0.0283 8,873.3 -0.0037 -0.0262
10 2.33 -0.0292 9,052.6 0.0202 -0.0407
11 2.52 0.0815 9,254.6 0.0223 0.0688
12 2.55 0.0119 9,249.5 -0.0006 0.0122
13 2.55 0.0000 9,180.8 -0.0074 0.0042
14 2.49 -0.0235 9,059.4 -0.0132 -0.0160
15 2.52 0.0120 9,012.9 -0.0051 0.0150
16 2.53 0.0040 9,081.2 0.0076 -0.0004
17 2.70 0.0672 8,945.8 -0.0149 0.0757
18 2.61 -0.0333 8,882.4 -0.0071 -0.0293
19 2.61 0.0000 8,984.9 0.0115 -0.0066
20 2.67 0.0230 9,060.2 0.0084 0.0182
21 2.75 0.0300 8,988.9 -0.0079 0.0345
22 2.72 -0.0109 8,855.0 -0.0149 -0.0024
23 2.61 -0.0404 8,427.0 -0.0483 -0.0128
24 2.53 -0.0307 8,486.2 0.0070 -0.0347
25 2.52 -0.0040 8,769.8 0.0334 -0.0230
26 2.65 0.0516 8,913.6 0.0164 0.0422
27 2.70 0.0189 8,919.5 0.0007 0.0185
28 2.80 0.0370 9,176.8 0.0288 0.0206
29 2.84 0.0143 9,199.6 0.0025 0.0129
30 2.75 -0.0317 9,112.8 -0.0094 -0.0263
31 2.68 -0.0255 9,056.0 -0.0062 -0.0219
32 2.74 0.0224 9,011.5 -0.0049 0.0252
33 2.71 -0.0109 9,116.3 0.0116 -0.0176
34 2.76 0.0185 9,380.2 0.0289 0.0019
35 2.72 -0.0145 9,373.8 -0.0007 -0.0141
36 2.73 0.0037 9,616.0 0.0258 -0.0111
37 2.84 0.0403 9,554.8 -0.0064 0.0439
38 2.83 -0.0035 9,547.6 -0.0008 -0.0031
39 2.86 0.0106 9,634.7 0.0091 0.0054
40 2.94 0.0280 9,569.0 -0.0068 0.0319
41 3.06 0.0408 9,770.7 0.0211 0.0288
42 3.05 -0.0033 9,737.1 -0.0034 -0.0013
43 2.98 -0.0230 9,717.9 -0.0020 -0.0218
44 2.90 -0.0268 9,705.1 -0.0013 -0.0261
45 2.86 -0.0138 9,579.6 -0.0129 -0.0064
46 2.85 -0.0035 9,843.4 0.0275 -0.0192
 47 2.87 0.0070 10,015.6 0.0175 -0.0030
48 2.79 -0.0279 9,991.3 -0.0024 -0.0265
49 2.83 0.0143 10,073.1 0.0082 0.0097
50 3.00 0.0601 10,057.5 -0.0015 0.0610
51 2.93 -0.0233 9,993.9 -0.0063 -0.0197
52 2.96 0.0102 10,082.0 0.0088 0.0052
53 3.09 0.0439 10,233.3 0.0150 0.0353
54 3.22 0.0421 10,307.6 0.0073 0.0379
55 3.32 0.0311 10,284.0 -0.0023 0.0324
56 3.24 -0.0241 10,080.9 -0.0197 -0.0128
57 3.07 -0.0525 10,161.3 0.0080 -0.0570
58 3.18 0.0358 9,889.2 -0.0268 0.0511
59 3.32 0.0440 9,996.6 0.0109 0.0378
60 3.36 0.0120 9,791.9 -0.0205 0.0237
Beta 0.571377
Alpha 0.0021
 GORDON GROWTH MODEL

This model is designed to value the equity in a stable firm paying

dividends, which are roughly equal to Free Cashflows to
Equity.

Assumptions in the model:

1. The firm is in steady state and will grow at a stable rate forever.
2. The firm pays out what it can afford to in dividends, i.e., Dividends = FCFE.

User defined inputs

The user has to define the following inputs to the model:
1. Current Earnings per share and Payout ratio (Dividends/Earnings)
2. Cost of Equity or Inputs to the CAPM (Beta, Riskfree rate, Risk Premium)
3. Expected Growth Rate in Earnings and dividends forever.

Inputs to the model

Fundamental parameters
1 Current Earnings per share = 21513.16 (in currency)
2 Current Payout Ratio = 56.00% (in percent)
3 Current Dividends per share = 12,047.37 (in currency)

Assumption parameters
1 Cost of Equity
Are you directly entering the cost of equity? no (Yes or No)
If yes, enter cost of equity = 2.00% (in percent)
If no, enter the inputs for the CAPM
Beta of the stock = 0.92
Riskfree rate = 9.20% (in percent)
Risk Premium= 6.00% (in percent)

Cost of Equity = 14.72%

2 Expected Growth Rate = 6% (in percent) The expected growth rate for a stable firm
 cannot be significantly higher than the nominal
growth rate in the economy in which the firm
operates. It can be lower.
Before reviewing the output, check to see if any warnings appear on the next page.
Warnings

Output from the program

Gordon Growth Model Value = 146,447.38

Graph for Stock Value as Growth Rate changing

Variance change of Growth Rate= 1.0%

Value of Stock

Growth rate Value

11.00% 359477.96
10.00% 280764.97
Value of Stock vs Growth Rate
9.00% 229574.00
8.00% 193618.44
300000.00
7.00% 166977.79
6.00% 146447.38 250000.00

5.00% 130141.34 200000.00

150000.00 Value
4.00% 116877.47
3.00% 105877.05 100000.00

2.00% 96606.27 50000.00

1.00% 88686.90 0.00

0.00% 2.00% 4.00% 6.00% 8.00% 10.00%
Growth Rate

Value

400000.00
300000.00
200000.00 Value
100000.00
0.00
0 % 0% 0% 0% 0% 0%
400000.00
300000.00
200000.00 Value
100000.00
0.00
% % % % % %
.00 .00 .00 .00 .00 .00
11 9 7 5 3 1
Growth Rate

Value

% 10.00%

Value

0%
 Value

%
00
 Two-Stage Dividend Discount Model

This model is designed to value the equity in a firm, with two stages of growth, an initial
period of higher growth and a subsequent period of stable growth.

Assumptions
1. The firm is expected to grow at a higher growth rate in the first period.
2. The growth rate will drop at the end of the first period to the stable growth rate.
3. The dividend payout ratio is consistent with the expected growth rate.

The user has to define the following inputs:

1. Length of high growth period
2. Expected growth rate in earnings during the high growth period.
3. Dividend payout ratio during the high growth period.
4. Expected growth rate in earnings during the stable growth period.
5. Expected payout ratio during the stable growth period.
6. Current Earnings per share
7. Inputs for the Cost of Equity

Inputs to the model

Fundamental parameters
1 Current Earnings per share = 2.7 ( in VND)
2 Current Payout Ratio = 33.33% ( in percent)
3 Current Dividends per share = 0.90 (in VND)
4 Riskfree rate = 7.50% (in percent)
5 Risk Premium= 5.50% (in percent)

Assumption parameters

For High Growth Period

1 Cost of Equity for high growth period (r)
Are you directly entering the cost of equity? (Yes or No) no
If yes, enter cost of equity = 13.04% (in percent)
If no, enter the inputs for the CAPM
Beta of the stock = 1.45

Cost of Equity for high growth period 15.48%

2 Growth rate for high growth period (g)= 13% ( in percent)

3 Length of the high growth period (n) = 5 (in years)

4 Payout Ratio for high growth period (1-b1) 33.33% (in percent)

For Stable Growth Period

1 Cost of Equity for stable growth period (rn)
Are you directly entering the cost of equity? (Yes or No) no
If yes, enter cost of equity = 2.00% (in percent)
If no, enter the inputs for the CAPM
Beta of the stock = 1.1
Riskfree rate = 7.50% (in percent)
Risk Premium= 5.50% (in percent)

Cost of Equity for stable growth period 13.55%(in percent)

2 Growth rate for stable growth period (gn) = 6% (in percent)

3 Stable Payout Ratio (1- bn)= 69.33% (in percent)

Before reviewing the output, check to see if any warnings appear on the next page.
Warnings

Output from the program

Present Value of dividends in high growth phase (P1) = 4.22

Present Value of Terminal Price (P2)= 23.62

Value of the stock (P0) = 27.85

 Stock value range as parameters changing

Min Max
Range of EPS1 3 4 (VND)
Range of (1-b) 35.00% 37.00% ( in percent)
Range of r 12.00% 14.00% ( in percent)
Range of g 8.00% 9.00% (in percent)
Range of n 5 7 (in years)
Range of rn 10.00% 12.00% (in percent)
Range of gn 3.00% 4.00% (in percent)
Range of (1-bn) 60.00% 65.00% (in percent)

Min P0 18.701 Max P0 42.728

With value of paramaters as follows: With value of paramaters as follows:

EPS1 3 EPS1 4
(1-b) 35.00% (1-b) 37.00%
r 14.00% r 12.00%
g 8.00% g 9.00%
n 5 n 7
rn 12.00% rn 10.00%
gn 3.00% gn 4.00%
(1-bn) 60.00% (1-bn) 65.00%
 growth, an initial
rowth.
 THREE-STAGE DIVIDEND DISCOUNT MODEL

This model is designed to value the equity in a firm with three stages of
growth - an initial period of high growth, a transition period of declining
growth and a final period of stable growth.

Assumptions
1. The firm is assumed to be in an extraordinary growth phase currently.
2. This extraordinary growth is expected to last for an initial period that has to be specified.
3. The growth rate declines linearly over the transition period to a stable growth rate.
4. The firm's dividend payout ratio changes consistently with the growth rate.

The user should enter the following inputs:

1. Length of each growth phase
2. Growth rate in each growth phase
3. Dividend payout ratios in each growth phase.
4. Costs of Equity in each growth phase

Inputs to the model

Fundamental parameters
1 Current Earnings per share = 2.7 ( in VND)
2 Current Payout Ratio = 33.33% ( in percent)
3 Current Dividends per share = 0.90 (in VND)

Assumption parameters

For Transition Growth Period

1 Cost of Equity for Extraordinary growth period (ra)
Are you directly entering the cost of equity? (Yes or No) no
If yes, enter cost of equity = 2% (in percent)
If no, enter the inputs for the CAPM
Beta of the stock = 1.25
Riskfree rate = 7.00% (in percent)
Risk Premium= 5.50% (in percent)

Cost of Equity for Extraordinary growth period (ra) 13.88%

2 Growth rate initially (ga)= 18% ( in percent)

3 Length of the Extraordinary growth period (n) = 6 (in years)

4 Payout Ratio for extraordinary growth period (1-b1) 33.33%

For Stable Growth Period

1 Cost of Equity for Stable growth period (rn)
Are you directly entering the cost of equity? (Yes or No) no
If yes, enter cost of equity = 2.00% (in percent)
If no, enter the inputs for the CAPM
Beta of the stock = 1.25
Riskfree rate = 7.00% (in percent)
Risk Premium= 5.50% (in percent)

2 Cost of Equity for Stable growth period (rn) 13.88%

3 Growth rate for stable growth period (gn) = 6% (in percent)

4 Stable Payout Ratio (1- bn)= 33.33% (in percent)

Before reviewing the output, check to see if any warnings appear on the next page.
Warnings

#REF!

#REF!

#REF!

Output from the program

Gap between two years of growth rate in the extraordinary phase 2.00%

The dividends for the Extraordinary growth phase are shown below (upto 10 years)
Year 1 2 3 4 5 6 7
Earning 3.13 3.57 4.00 4.40 4.75 5.04 0.00
Dividends 1.04 1.19 1.33 1.47 1.58 1.68 0.00
Present Value 0.92 0.92 0.90 0.87 0.83 0.77 0
Present Value of dividends in extraordinary growth phase (P 1)= 5.21

Present Value of Terminal Price (P2)= 10.36

Value of the stock (P0)= 15.57

Scenario analysis
The dividends for Extraordinary growth phase are shown below (up to 10 years)
Length of the Extraordinary growth period (n) = 6
Warning: 6% =< ga <= 18%

Year 1 2 3 4 5 6 7
1-b1 33.33% 33.33% 33.33% 33.33% 33.33% 33.33% 33.33%
ga 16% 14% 12% 10% 8% 6%
Earning 3.13 3.57 4.00 4.40 4.75 5.04 0.00
Dividend 1.04 1.19 1.33 1.47 1.58 1.68 0.00
PV of Dividends 0.92 0.92 0.90 0.87 0.83 0.77 0.00

Present Value of dividends in extraordinary growth phase (P 1)= 5.21

Present Value of Terminal Price (P2)= 10.36

Value of the stock (P0)= 15.57

MODEL
 8 9 10
0.00 0.00 0.00
0.00 0.00 0.00
0 0 0
 8 9 10
33.33% 33.33% 33.33%

0.00 0.00 0.00

0.00 0.00 0.00
0.00 0.00 0.00
 THREE-STAGE DIVIDEND DISCOUNT MODEL

This model is designed to value the equity in a firm with three stages of
growth - an initial period of high growth, a transition period of declining
growth and a final period of stable growth.

Assumptions
1. The firm is assumed to be in an extraordinary growth phase currently.
2. This extraordinary growth is expected to last for an initial period that has to be specified.
3. The growth rate declines linearly over the transition period to a stable growth rate.
4. The firm's dividend payout ratio changes consistently with the growth rate.

The user should enter the following inputs:

1. Length of each growth phase
2. Growth rate in each growth phase
3. Dividend payout ratios in each growth phase.
4. Costs of Equity in each growth phase

Inputs to the model

Fundamental parameters
1 Current Earnings per share = 1.33 ( in VND)
2 Current Payout Ratio = 12.03% ( in percent)
3 Current Dividends per share = 0.16 (in VND)

Assumption parameters

For High Growth Period

1 Length of the high-growth period (n1) 5
2 Growth Rate for High growth period (ga) 36%

3 Cost of Equity
Do you want to enter cost of equity directly? No (Yes or No)
If yes, enter the cost of equity = (in percent)
If no, enter the inputs to the cost of equity
Beta of the stock (βa) = 1.6
Riskfree rate= 7.50% (in percent)
Risk Premium= 5.50% (in percent)

Cost of equity for the high-growth period 16.30%

4 Dividend payout ratio in high growth period 10.00%

For Transition Growth Period

1 Length of the transition period 5

2 Growth rate declines linearly from 36.00% to 6.00%

3 Payout ratio increases linearly from 10.00% to 60%

4 Beta declines linearly from 1.6 to 1

For Stable Growth Period

1 Growth rate for stable period 6.00%

2 Payout ratio for stable period 60%

3 Beta during stable period 1

4 Cost of Equity during Stable Period 13.00%

Output from the program

EPSn1 6.19
Gap for growth rate in transition phase (between two years) 6%
Gap for payout ratio (between two years) -10.00%
Gap for Beta changing (between two years) 0.12

The dividends for the transition phase are shown below (upto 10 years)

Year 0 1 2 3 4 5 6
Earnings 6.19 8.04 9.97 11.77 13.18 13.97 0.00
Growth rate (gt) 36% 30% 24% 18% 12% 6% 0%
Payout ratio (Πt) 10% 20% 30% 40% 50% 60% 0%
Dividends 1.61 2.99 4.71 6.59 8.38 0.00
Beta 1.6 1.48 1.36 1.24 1.12 1.00 0.00
Cost of Equity (rt) 16.30% 15.64% 14.98% 14.32% 13.66% 13.00% 0.00%
Future value 1.16 1.33 1.52 1.73 1.95 1.95
Present value of dividends 1.39 2.25 3.10 3.82 4.29 0

Present value of dividends in high-growth phase 1.31

Present value of dividends in transition phase 6.98
Present value of terminal price at the end of transition 20.21

Value of the stock = 28.50

Scenario analysis
The dividends for Extraordinary growth phase are shown below (up to 10 years)
Length of the Extraordinary growth period (n) = 5
Warning: 6.00% =< gt <= 36%
10.00% =< Πt <= 60%
1 =< Beta <= 1.6
13.00% =< rt <= 16.30%

The dividends for the transition phase are shown below (upto 10 years)

Year 0 1 2 3 4 5 6
Earnings 6.19 8.04 9.97 11.77 13.18 13.97 0.00
Growth rate (gt) 36% 30.00% 24% 18% 12% 6%
Payout ratio (Πt) 10.00% 20% 30% 40% 50% 60%
Dividends 0.62 1.61 2.99 4.71 6.59 8.38 0.00
Beta 1.6 1.48 1.36 1.24 1.12 1
Cost of Equity (rt) 16.30% 15.64% 14.98% 14.32% 13.66% 13.00% 0.00%
Future Value 1.16 1.33 1.52 1.73 1.95 1.95
PV of Dividends 1.39 2.25 3.10 3.82 4.29 0.00

Present value of dividends in high-growth phase 1.31

Present value of dividends in transition phase 6.98
Present value of terminal price at the end of transition 20.21

Value of Stock 28.50

COUNT MODEL
7 8 9 10
0.00 0.00 0.00 0.00
0% 0% 0% 0%
0% 0% 0% 0%
0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00
0.00% 0.00% 0.00% 0.00%
1.95 1.95 1.95 1.95
 0 0 0 0

7 8 9 10
0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00% 0.00% 0.00% 0.00%

1.95 1.95 1.95 1.95
0.00 0.00 0.00 0.00
 FCFE STABLE GROWTH MODEL

This model is designed to value the equity in a stable firm on the basis of
free cashflows to equity, especially when they are
different from dividends paid.

Assumptions in the model:

1. The firm is in steady state and will grow at a stable rate forever.

2. The firm does not pay out what it can afford to in dividends, i.e., Dividends ≠ FCFE.

User defined inputs

The user has to define the following inputs to the model:
1. Expected FCFE next year (based on historical FCFE)
2. Cost of Equity or Inputs to the CAPM (Beta, Riskfree rate, Risk Premium)
3. Expected Growth Rate in free cashflows to equity forever.

Inputs to the model

Assumption parameters
1 Expected FCFE next year 5000 (in currency)

2 Cost of Equity
Are you directly entering the cost of equity? (Yes or No) no
If yes, enter cost of equity = 15.00% (in percent)
If no, enter the inputs for the CAPM
Beta of the stock = 1.1
Riskfree rate = 7% (in percent)
Risk Premium= 5.50% (in percent)

Cost of Equity for high growth period 13.05%

3 Expected Growth Rate = 6% (in percent) The expected growth rate for a stable firm
cannot be significantly higher than the nominal
growth rate in the economy in which the firm
operates. It can be lower.
 Warnings:

This is the output from the Gordon Growth Model

Gordon Growth Model Value 70,921.99

Variance change of Growth Rate= 1%

Growth rate Value

11% 243,902 Value of Stock Vs. Growth
10% 163,934
9% 123,457 Rate
8% 99,010
VND

7% 82,645
300,000
6% 70,922
5% 62,112 200,000
4% 55,249 Value
3% 49,751 100,000
2% 45,249
1% 41,494 0
0% 38,314 0% 2% 4% 6% 8% 10% 12%
%

Value of Stock
VND

300,000

250,000

200,000

150,000

100,000

50,000

% Value of Stock
wth rate for a stable firm
antly higher than the nominal
economy in which the firm
s. Growth

Value

% 12%

Value of Stock
 Two-Stage FCFE Discount Model

This model is designed to value the equity in a firm, with two stages of growth, an initial
period of higher growth and a subsequent period of stable growth.

Assumptions

1. The firm is expected to grow at a higher growth rate in the first period.

2. The growth rate will drop at the end of the first period to the stable growth rate.

3. The free cashflow to equity is the correct measure of expected cashflows to stockholders.

The user has to define the following inputs:

1. Length of high growth period

2. Expected growth rate in earnings during the high growth period.

3. Capital Spending, Depreciation and Working Capital needs during the high growth period.

4. Expected growth rate in earnings during the stable growth period.

5. Inputs for the cost of equity.

Inputs to the model

Fundamental parameters
1 Current Earnings per share = $3.10 (in currency)

2 Current Dividends per share = $0.00 (in currency)

3 Current Capital Spending/sh = $1.00 (in currency)

4 Current Depreciation / share = $0.60 (in currency)

5 Current Revenues/ share = $12.40 (in currency)

6 Working Capital/ share = $2.48 (in currency)

7 Chg. Working Capital/share = $1.00 (in currency)

Assumption parameters

For High Growth Period

1 Length of high growth period = 5 (in years)
2 Cost of Equity for high growth period

Do you want to enter cost of equity directly? No (Yes or No)

If yes, enter the cost of equity = (in percent)

If no, enter the inputs to the cost of equity

Beta of the stock = 1.3

Riskfree rate= 7.50% (in percent)

Risk Premium= 5.50% (in percent)

Cost of Equity for high growth period 14.65%

3 Growth rate for high growth period 18.78%

4 Growth rate for Capital Spending 18.78%

5 Growth rate for Depreciation 18.78%

6 Growth rate for Revenues 15.00%

7 Fraction of Working capital to Revenues 20.00%

8 Debt ratio financing for capital expenditure & working capital 18.01%

For Stable Growth Period

1 Growth rate for stable growth period 6.00% (in percent)

2 Cost of Equity for stable growth period

Do you want to enter cost of equity directly? No (Yes or No)

If yes, enter the cost of equity = (in percent)

If no, enter the inputs to the cost of equity

Beta of the stock = 1.1

Riskfree rate= 7.50% (in percent)

 Risk Premium= 5.50% (in percent)

Cost of Equity for stable growth period 13.55%

3 Fraction of Working Capital to Revenues for Stable Growth Period 10%

4 Debt ratio financing for capital expenditure & working capital 10.00%

Output from the program

The FCFE for the high growth phase are shown below (upto 10 years)

Year 1 2 3 4 5

Earnings $3.68 $4.37 $5.20 $6.17 $7.33

Capital Expenditure 1.19 1.41 1.68 1.99 2.36

Depreciation $0.71 $0.85 $1.01 $1.19 $1.42

- (CapEx-Depreciation)*(1-DR $0.39 $0.46 $0.55 $0.65 $0.78

Working Capital $2.85 $3.28 $3.77 $4.34 $4.99

-Chg. Working Capital*(1-DR) $0.31 $0.35 $0.40 $0.46 $0.53

Free Cashflow to Equity $2.99 $3.56 $4.24 $5.05 $6.02

Present Value $2.61 $2.71 $2.81 $2.93 $3.04

PV of FCFE during the high-growth period = 14.09

Present Value of Terminal Price = 93.82

Value of the stock = 107.91
f growth, an initial
growth.
 6 7 8 9 10 n+1

$0.00 $0.00 $0.00 $0.00 $0.00 $7.77

0.00 0.00 0.00 0.00 0.00 $2.51

$0.00 $0.00 $0.00 $0.00 $0.00 $1.50

$0.00 $0.00 $0.00 $0.00 $0.00 $0.90

$0.00 $0.00 $0.00 $0.00 $0.00 $2.64

$0.00 $0.00 $0.00 $0.00 $0.00 0.27

$0.00 $0.00 $0.00 $0.00 $0.00 $6.60

$0.00 $0.00 $0.00 $0.00 $0.00

 THREE-STAGE FCFE DISCOUNT MODEL

This model is designed to value the equity in a firm with three stages of growth - an initial
period of high growth, a transition period of declining growth and a final period of stable
growth.

Assumptions

1. The firm is assumed to be in an extraordinary growth phase currently.

2. This extraordinary growth is expected to last for an initial period that has to be specified.

3. The growth rate declines linearly over the transition period to a stable growth rate.

4. The relationship between capital spending and depreciation changes consistently with the growth rate.

The user should enter the following inputs:

1. Length of each growth phase

2. Growth rate in each growth phase

3. Capital Spending, Depreciation and Working Capital in each growth phase.

4. Costs of Equity in each growth phase

Inputs to the model

Fundamental parameters
Current Earnings per share = $21,513.16 (in currency)
Current Dividends per share = $15,000.00 (in currency)

Current Capital Spending/sh = $8,565.78 (in currency)

Current Depreciation / share = $2,328.95 (in currency)

Current Revenues/ share = $104,238.00 (in currency)

Working Capital/ share = $122,545.00 (in currency)

Chg. Working Capital/share = $21,785.09 (in currency)

Riskfree rate 9.20% (in percent)

Risk Premium 6.00% (in percent)

 Assumption parameters

For High Growth Period

1 Length of High Growth Period 1 (in years)

2 Cost of Equity

Do you want to enter cost of equity directly? no (Yes or No)

If yes, enter the cost of equity = 10%

If no, enter the inputs to the cost of equity for the initial high growth stage

Beta of the stock = 0.92

Cost of Equity for High Growth Period 14.72%

4 Growth rate for high growth period 6.00% (in percent)

5 Growth rate for Capital Spending 19% (in percent)

6 Growth rate for Depreciation 19% (in percent)

7 Growth rate for Revenues 19% (in percent)

8 Fraction of Working capital to Revenues 100% (in percent)

9 Debt ratio financing for capital expenditure & working capital 13%

For Transition Growth Period

1 Length of Transition Growth Period 5 (in years)

2 Beta of the stock will decline linearly from 0.92 to

3 Growth rate for Capital Spending 6%

4 Growth rate for Depreciation 6%

5 Growth rate for Revenues 10%

6 Fraction of Working capital to Revenues 100%

7 Debt ratio financing for capital expenditure & working capital 13%

8 Growth rate for Transition period will decline linearly from 6.00% to

For Stable Growth Period

1 Cost of Equity for Stable Period

Do you want to enter cost of equity directly? No (Yes or No)

If yes, enter the cost of equity = 10% (in percent)

If no, enter the inputs to the cost of equity for the initial high growth stage

Beta of the stock = 0.84

Cost of Equity for Stable Period 14.24% (in percent)

2 Growth rate for stable growth period 2.00%

3 Fraction of Working Capital to Revenues for Stable Growth Period 80%

4 Debt ratio financing for capital expenditure & working capital 10%

Output from the program

The FCFE for the high growth phase are shown below (upto 10 years)

Year 1 2 3 4

Earnings 22803.95 0.00 0.00 0.00

Capital Expenditure 10174.43 0.00 0.00 0.00

 Depreciation 2766.33 0.00 0.00 0.00

- (CapEx-Depreciation)*(1-DR) 6445.05 0.00 0.00 0.00

Working Capital 123813.90 0.00 0.00 0.00

-Chg. Working Capital*(1-DR) 1,103.94 0.00 0.00 0.00

Free Cashflow to Equity $15,254.96 $0.00 $0.00 $0.00

PV of FCFE $13,297.56 $0.00 $0.00 $0.00

The FCFE for the Transition growth phase are shown below (upto 10 years)
Gap between two years of growth rate in the extraordinary phase 0.80%

Gap for Beta changing (between two years) in the extraordinary phase 0.02

Year 1 2 3 4

Earnings 23989.75 25045.30 26147.30 27297.78

Growth rate for Earning 5.20% 4.40% 4.40% 4.40%

Capital Expenditure 10784.90 11431.99 12117.91 12844.99

Depreciation 2932.31 3108.24 3294.74 3492.42

- (CapEx-Depreciation)*(1-DR) 6831.76 7241.66 7676.16 8136.73

Working Capital 136195.29 149814.81 164796.30 181275.93

-Chg. Working Capital*(1-DR) 10,771.81 11848.99 13033.89 14337.28

Free Cashflow to Equity 6386.19 5954.65 5437.25 4823.77

Beta 0.90 0.89 0.87 0.86

Cost of Equity 15% 15% 14% 14%

Future Value 1.15 1.31 1.50 1.72

Present Value 5571.42 4535.96 3619.47 2808.46

PV of FCFE in the high growth period 13297.56

PV of FCFE in the Transition growth period 16236.35

PV of Terminal Price 133266.84

Value of Stock 162800.74

 MODEL

ges of growth - an initial

a final period of stable
0.84
2.00%

5 6 7 8 9 10

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

$0.00 $0.00 $0.00 $0.00 $0.00 $0.00

$0.00 $0.00 $0.00 $0.00 $0.00 $0.00

5 6 7 8 9 10 Terminal time

28498.88 0.00 0.00 0.00 0.00 0.00 29,068.86

4.40% 0.00% 0.00% 0.00% 0.00% 0.00% 2.00%

13615.69 0.00 0.00 0.00 0.00 0.00 13,888.00

3701.97 0.00 0.00 0.00 0.00 0.00 3,776.01

8624.93 0.00 0.00 0.00 0.00 0.00 9,100.79

199403.52 0.00 0.00 0.00 0.00 0.00 162,713.27

15771.01 0.00 0.00 0.00 0.00 0.00 -16,749.90

4102.94 0.00 0.00 0.00 0.00 0.00 36,717.96

0.84 0.82 0.81 0.79 0.78 0.76

14% 0% 0% 0% 0% 0%
1.96 1.96 1.96 1.96 1.96 1.96

2091.03 0.00 0.00 0.00 0.00 0.00

 FCFF STABLE GROWTH MODEL

This model is designed to value a stable firm on the basis of

free cashflows to firm.

Assumptions in the model:

1. The firm is in steady state and will grow at a stable rate forever.
2. The firm's leverage is known and constant.

User defined inputs

The user has to define the following inputs to the model:
1. Current EBIT and tax rate
2. Capital Spending and Depreciation
3. Change in working capital
4. Debt ratio
5. Cost of Equity or Inputs to the CAPM (Beta, Riskfree rate, Risk Premium) and Cost of Debt
6. Expected Growth Rate in free cashflows to firm forever.

Inputs to the model

Fundamental parameters

1 Current EBIT 1500.00 (in currency)

2 Current tax rate 36%

3 Capital Expenditures 660.00 (in currency)

4 Depreciation 550.00 (in currency)
5 Change in Working Capital = 150.00 (in currency) If negative, enter zero.
Do you want to change the capital expenditure/depreciation ratio? Yes (Yes or No)
If so, enter capital expenditures as a percent of depreciation 125%
Book Value of Debt = 1,479.00
Number of Oustanding Shares 12,000.00

Assumption parameters
1 Debt ratio 23.67% ( in percent)
2 Cost of Equity
Are you directly entering the cost of equity? (Yes or No) No
If yes, enter cost of equity = (in percent)
If no, enter the inputs for the CAPM
Beta of the stock = 1.05
Riskfree rate = 7.50% (in percent)
Risk Premium= 5.50% (in percent)

Cost of Equity 13.28%

3 Cost of Debt 8.50% This is a pre-tax cost of borrowing.

4 Expected Growth Rate 5% (in percent) The expected growth rate for a stable firm
cannot be significantly higher than the nominal
growth rate in the economy in which the firm
operates. It can be lower.

Warnings:

This is the output from the Model

Firm Details: from inputs on prior page

EBIT (1- tax rate) = 960.00

- (Capital Spending - Depreciation) 137.50

- Change in Working Capital 150.00

Free Cashflow to Firm = 672.50

Cost of Equity = 13.28%

Cost of Debt = 5.44%

Cost of Capital = 11.42%

Expected Growth rate = 5.00%

Value of Firm 10,998.05

 Value of Equity 9,519.05
Value of Share 0.79

Graph for Stock Value as Growth Rate changing

Variance change of Growth Rate= 1.0%

Growth rate Value

10.00% 4.22
Value of Stock
5.00
9.00% 2.40
8.00% 1.65 4.00

VND
7.00% 1.23
6.00% 0.97 3.00
5.00% 0.79
2.00
4.00% 0.66
3.00% 0.56 1.00
2.00% 0.48
1.00% 0.42 0.00
0.00% 0.37 -3.00% 2.00% % 7.00% 12.00%
Value of Stock

Value of Firm
4.50
VND

4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
0% 0% 0% 0% 0 % 0% 0% 0% 0% 0% 0 %
.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
1 0
Value of Firm %
L

basis of
ate for a stable firm
higher than the nominal
nomy in which the firm
tock

12.00%
Value of Stock

Firm

% 0% 0% 0% 0 %
0 0 0 0
3. 2 . 1 . 0.
 Two-Stage FCFF Discount Model

This model is designed to value a firm, with two stages of growth, an initial
period of higher growth and a subsequent period of stable growth.

Assumptions

1. The firm is expected to grow at a higher growth rate in the first period.

2. The growth rate will drop at the end of the first period to the stable growth rate.

The user has to define the following inputs:

1. Length of high growth period

2. Expected growth rate in earnings during the high growth period.

3. Capital Spending, Depreciation and Working Capital needs during the high growth period.

4. Expected growth rate in earnings during the stable growth period.

5. Inputs for the cost of capital. (Cost of equity, Cost of debt, Weights on debt and equity)

Inputs to the model

Fundamental parameters

1 Current EBIT = 532.00

2 Current Interest Expense = 118.00

3 Current Capital Spending 310.00

4 Current Depreciation & Amort' 207.00

5 Tax Rate on Income = 0.36

6 Current Revenues = 16,701.00

7 Current Working Capital = 3,755.00

8 Chg. Working Capital = 499.00 Last year

9 Book Value of Debt = 1,479.00 1,315.00

10 Book Value of Equity = 12,941.00 12,156.00

11 Number of Oustanding Shares 12,000.00

12 Riskfree rate= 7.50% (in percent)

13 Risk Premium= 5.50% (in percent)

Assumption parameters

For High Growth Period

1 Debt Ratio for High-Growth period 50%

2 Enter length of extraordinary growth period = 5 (in years)

3 Growth rate in high growth period 8.00% (in percent)

Costs of Components

Do you want to enter cost of equity directly? no (Yes or No)

If yes, enter the cost of equity = (in percent)

If no, enter the inputs to the cost of equity

Beta of the stock = 1.25

4 Cost of Equity for High-growth period 14.38%

5 Cost of Debt for High-growth period 9.50% (in percent)

6 Cost of Capital for High-growth period 10.23%

7 Growth rate for Capital Spending 8% (in percent)

8 Growth rate for Depreciation 8% (in percent)

9 Growth rate for Revenues 8% (in percent)

10 Fraction of Working capital to Revenues 10% (in percent)

 For Stable Growth Period

1 Debt Ratio for Stable-Growth period 25%

2 Growth rate in stable growth period? 5.00% (in percent)

Costs of Components

Do you want to enter cost of equity directly? yes

If yes, enter the cost of equity = 8.00%

If no, enter the inputs to the cost of equity

Beta of the stock = 1

4 Cost of Equity for Stable-growth period 13.00% ( in percent)

5 Cost of Debt for Stable-growth period 8.50% (in percent)

6 Cost of Capital for Stable-growth period 11.11%

7 Fraction of Working Capital to Revenues 5% (in percent)

Output from the program

The FCFE for the high growth phase are shown below (upto 10 years)

Year 1 2 3 4 5

EBIT(1-tax) 389.42 445.40 509.43 582.66 666.42

- Capital Expenditure 334.8 361.584 390.51072 421.7515776 455.49170381

Depreciation 223.56 241.4448 260.760384 281.62121472 304.1509119

Working Capital 1803.708 1948.00464 2103.8450112 2272.1526121 2453.9248211

-Chg. Working Capital -1,951.29 144.30 155.84 168.31 181.77

FCFF 2229.48 180.97 223.84 274.22 333.31

Present Value of FCFF 2,006.55 146.59 163.18 179.93 196.82

PV of FCFF during the high-growth period = 2,693.07

Present Value of Terminal Price = 17,163.33

Value of the Firm = 19,856.40

Value of Equity = 18,377.40

Value per Share = 1.53

wth, an initial
growth.
 6 7 8 9 10 Terminal Price

0.00 0.00 0.00 0.00 0.00 699.74

0 0 0 0 0 478.27

0 0 0 0 0 319.36

0 0 0 0 0 1,288.31

0.00 0.00 0.00 0.00 0.00 -1,165.61

0.00 0.00 0.00 0.00 0.00 1706.45

0.00 0.00 0.00 0.00 0.00

 Three-Stage FCFF Discount Model

This model is designed to value a firm, with three stages of growth, an initial
period of higher growth, a transition period of declining growth and
a subsequent period of stable growth.

INPUTS FOR VALUATION

Fundamental parameters
1 Current EBIT = 532.00
2 Current Interest Expense = 118.00
3 Current Capital Spending 310.00
4 Current Depreciation & Amort'n = 207.00
5 Tax Rate on Income = 0.36
6 Current Revenues = 16,701.00
7 Current Working Capital = 3,755.00
8 Chg. Working Capital = 499.00
9 Book Value of Debt = 1,479.00
10 Book Value of Equity = 12,941.00
11 Number of Oustanding Shares 12,000.00
12 Riskfree rate= 7.50% (in percent)
13 Risk Premium= 5.50% (in percent)

Assumption parameters

For High Growth Period

1 Debt Ratio for High-Growth period 50%

2 Length of High Growth Period 5 (in years)

Costs of Components
Do you want to enter cost of equity directly? no (Yes or No)
If yes, enter the cost of equity = (in percent)
If no, enter the inputs to the cost of equity
Beta of the stock = 1.25
3 Cost of Equity for High-growth period 14.38%

4 Cost of Debt for High-growth period 9.50% (in percent)

 5 Cost of Capital for High-growth period 11.94%

6 Growth rate in high growth period 8.00% (in percent)

7 Growth rate for Capital Spending 8% (in percent)

8 Growth rate for Depreciation 8% (in percent)

9 Growth rate for Revenues 8% (in percent)

10 Fraction of Working capital to Revenues 10% (in percent)

For Transition Growth Period

1 Debt Ratio for Transition Growth period varies from 25% to 50%

2 Length of Transition Growth Period 6 (in years)

3 Growth rate during transiton period declines from 8.00% to 5.00%

4 Beta of the stock declines from 1.25 to 1

5 Cost of Equity for Stable-growth period declines from 14.38% to 13.00%

6 Cost of Debt for transition growth period 8.50% (in percent)

7 Growth rate for Capital Spending 8% (in percent)

8 Growth rate for Depreciation 8% (in percent)

9 Growth rate for Revenues 8% (in percent)

10 Fraction of Working capital to Revenues 7% (in percent)

For Stable Growth Period

1 Debt Ratio for Stable-Growth period 25%

Costs of Components
Do you want to enter cost of equity directly? yes
If yes, enter the cost of equity = 8.00%
 If no, enter the inputs to the cost of equity
Beta of the stock = 1
2 Cost of Equity for Stable-growth period 13.00% ( in percent)

3 Cost of Debt for Stable-growth period 8.50% (in percent)

4 Cost of Capital for Stable-growth period 11.88%

5 Growth rate in stable growth period? 5.00% (in percent)

6 Fraction of Working Capital to Revenues for Stable Growth Period 2% (in percent)

Output from the program

The FCFE for the high growth phase are shown below (upto 10 years)

Year 1 2 3 4 5 6 7
EBIT(1-tax) 367.72 397.14 428.91 463.22 500.28 0.00 0.00
- Capital Expenditure 334.80 361.58 390.51 421.75 455.49 0.00 0.00
Depreciation 223.56 241.44 260.76 281.62 304.15 0.00 0.00
Working Capital 1,803.71 1,948.00 2,103.85 2,272.15 2,453.92 0.00 0.00
-Chg. Working Capital -1,951.29 144.30 155.84 168.31 181.77 0.00 0.00
FCFF 2,207.77 132.70 143.32 154.78 167.16 0.00 0.00
Present Value of FCFF 1,972.32 105.91 102.18 98.59 95.12 0.00 0.00

The FCFE for the transition growth phase are shown below (upto 10 years)

Year 1 2 3 4 5 6 7
EBIT(1-tax) 537.80 575.44 612.85 649.62 685.35 719.61 0.00
Growth rate for EBIT 7.50% 7% 6.50% 6% 5.50% 5%
- Capital Expenditure 491.93 531.29 573.79 619.69 669.27 722.81 0.00
Depreciation 328.48 354.76 383.14 413.79 446.90 482.65 0.00
Working capital 1,855.17 2,003.58 2,163.87 2,336.98 2,523.93 2,725.85 0.00
-Chg. Working capital -598.76 148.41 160.29 173.11 186.96 201.91 0.00
FCFF 973.11 250.51 261.91 270.61 276.02 277.54 0.00
Beta 1.25 1.2 1.15 1.1 1.05 1
Cost of Equity 14.38% 14.10% 13.83% 13.55% 13.28% 13.00% 7.50%
Debt ratio 25.00% 30.00% 35.00% 40.00% 45.00% 50.00%
Cost of Capital 12% 12% 11% 10% 10% 9% 0%
Cumulative WACC 1.12 1.25 1.39 1.53 1.68 1.83 1.83
Present Value 867.75 200.34 188.89 176.93 164.44 151.38 0.00
PV of FCFF during the high-growth period = 2,374.12
PV of FCFF during the transition growth period = 995.62
Present Value of Terminal Price = 895.216993
Value of the Firm = 4,264.96

Value of Equity = 2,785.96

Value per Share = 0.23
8 9 10
0.00 0.00 0.00
0.00 0.00 0.00
0.00 0.00 0.00
0.00 0.00 0.00
0.00 0.00 0.00
0.00 0.00 0.00
0.00 0.00 0.00

8 9 10 Terminal Price
0.00 0.00 0.00 755.60

0.00 0.00 0.00 758.95

0.00 0.00 0.00 506.78
0.00 0.00 0.00 817.75
0.00 0.00 0.00 -1,908.09
0.00 0.00 0.00 2,411.52

7.50% 7.50% 7.50%

0% 0% 0%
1.83 1.83 1.83
0.00 0.00 0.00
 Price/Book Value Multiples
This model is designed to value a stable firm on the basis of
price/book value ratio
Assumptions
1. The firm is in steady state and will grow at a stable rate forever.

Inputs to the model

Fundamental Parameters

Book Value of Equity 500 (in currency)

Current Earning 100 (in currency)
Number of Oustanding Shares 2000
Payout ratio 60% (in percent)

Assumption parameters

1 Expected growth rate 7%

2 Cost of equity
Are you directly entering the cost of equity? (Yes or No
If yes, enter cost of equity = (in percent)
If no, enter the inputs for the CAPM
Beta of the stock = 1.05
Riskfree rate = 7.50% (in percent)
Risk Premium= 5.50% (in percent)

Cost of Equity 13.28%

Output from the program

Price/Book Value 2.07

Value of Equity 1,035.86

Value of Stock 0.52

 Two-Stage Price/Book Value Multiples

This model is designed to value the equity in a firm, with two stages of growth,
an initial period of higher growth and a subsequent period of stable growth.

INPUTS FOR VALUATION

Fundamental Parameters

Book Value of Equity 500 (in currency)

Current Earning 125 (in currency)
Number of Oustanding Shares 2000
Payout ratio 60% (in percent)

Assumption Parameters

For High Growth Period

Length of extraordinary growth period = 5 (in years)

Growth rate 20%

Cost of Equity
Are you directly entering the cost of equity? (Yes or No
If yes, enter cost of equity = (in percent)
If no, enter the inputs for the CAPM
Beta of the stock = 1
Riskfree rate = 6.00% (in percent)
Risk Premium= 5.50% (in percent)

Cost of Equity 11.50%

Payout Ratio 20%

For Stable Growth Period

Growth rate 8%

Cost of Equity
Are you directly entering the cost of equity? (Yes or No
If yes, enter cost of equity = (in percent)
If no, enter the inputs for the CAPM
Beta of the stock = 1
Riskfree rate = 6.00% (in percent)
Risk Premium= 5.50% (in percent)

Cost of Equity 11.50%

Payout Ratio 68%

Output from the program

Price/Book Value 7.89

Value of Equity 3,943.76

Value of stock 1.97

Inputs for synthetic rating estimation
Enter the type of firm = 1 (Enter 1 if large manufacturing firm, 2 if smaller or riskier firm, 3 if financial service firm)
Enter current long term government bond rate = 6.00%
Output
Adjusted Earnings before interest and taxe $ 2,174.00
Adjusted Interest Expense = $ 367.00
Interest coverage ratio = 5.92
Estimated Bond Rating = A+
Estimated Default Spread = 1.50%
Estimated Cost of Debt = 7.50%

For large manufacturing firms For financial service firms

If interest coverage ratio is If long term interest coverage ratio is
> ≤ to Rating is Spread is greater than ≤ to Rating is
-100000 0.199999 D 14.00% -100000 0.049999 D
0.2 0.649999 C 12.70% 0.05 0.099999 C
0.65 0.799999 CC 11.50% 0.1 0.199999 CC
0.8 1.249999 CCC 10.00% 0.2 0.299999 CCC
1.25 1.499999 B- 8.00% 0.3 0.399999 B-
1.5 1.749999 B 6.50% 0.4 0.499999 B
1.75 1.999999 B+ 4.75% 0.5 0.599999 B+
2 2.499999 BB 3.50% 0.6 0.799999 BB
2.5 2.999999 BBB 2.25% 0.8 0.999999 BBB
3 4.249999 A- 2.00% 1 1.49999 A-
4.25 5.499999 A 1.80% 1.5 1.99999 A
5.5 6.499999 A+ 1.50% 2 2.49999 A+
6.5 8.499999 AA 1.00% 2.5 2.99999 AA
8.50 100000 AAA 0.75% 3 100000 AAA

For smaller and riskier firms

If interest coverage ratio is
greater than ≤ to Rating is Spread is
-100000 0.499999 D 9.00%
0.5 0.799999 C 12.70%
0.8 1.249999 CC 11.50%
1.25 1.499999 CCC 10.00%
1.5 1.999999 B- 8.00%
2 2.499999 B 6.50%
2.5 2.999999 B+ 4.75%
3 3.499999 BB 3.50%
3.5 4.499999 BBB 2.25%
4.5 5.999999 A- 2.00%
6 7.499999 A 1.80%
7.5 9.499999 A+ 1.50%
9.5 12.499999 AA 1.00%
12.5 100000 AAA 0.75%
er firm, 3 if financial service firm)

Spread
Operating
is Income Decline
14.00% -50.00%
12.70% -40.00%
11.50% -40.00%
10.00% -40.00%
8.00% -25.00%
6.50% -20.00%
4.75% -20.00%
3.50% -20.00%
2.25% -20.00%
2.00% -17.50%
1.80% -15.00%
1.50% -10.00%
1.00% -5.00%
0.75% 0.00%