Wacc HomeworkEssay Preview: Wacc HomeworkReport this essayWACC Homework1. Which WACC?So far, we have generally talked about valuing companies on a “stand-alone” basis. In the context of M&A transactions, we really want to be thinking about the value of the company from the perspective of different potential buyers. When you are valuing a company that you want to acquire, whose WACC (whose cost of debt and required return on equity) should you use, yours (the acquirer) or the target company’s?  (check one)The acquirer’s WACC ___The target company’s current WACC _Check__For what reason(s) would you adjust the WACC in valuing the target company?2. Private Equity firm’s WACCLet’s look at the WACC for the average private equity buyer. Based on the data presented in the first class, the average private equity M&A transaction in Q2 2015 was purchased at a multiple of 7.6x EBITDA and was financed with 4.8x debt and 2.8x equity. Let’s assume that the debt was composed of 3.8x senior debt and 1.0x subordinated (or mezzanine) debt. Use these multiples to calculate the ratio of each kind of capital for calculating the weighted-average. For example, 1.0/7.6 = 13.16%, so the WACC calculation would include a weighting of 13.16% * the cost of subordinated debt * (1 – corporate tax rate) to account for the contribution of the subordinated debt to the private equity firm’s WACC.
Currently, the typical cost of senior debt in a highly leveraged transaction is approximately 400 basis points above 3-month LIBOR, with a LIBOR floor of 1.0%. The cost of subordinated debt typically ranges between 11% – 15%; let’s assume 13% for this homework (all taxable). Let’s assume an effective corporate tax rate of 35%.The actual net return (net of fees and carried interest) to investors (limited partners) in private equity funds over the last 20 years is an annualized return of 13.45% (see Cambridge Associates Q1 2015 report being posted in Latte for week 5), but let’s assume that the private equity firms themselves are targeting a 20% return on their equity when they make investments.Using the above information, calculate the WACC for a typical private equity-backed acquisition.Portion of equity: 2.8/7.6=36.84%Portion of senior debt: 3.8/7.6=50%Portion of subordinated debt: 1.0/7.6=13.16%36.84%*20% + 13.16%*13%*(1-35%)+50%*5%*(1-35%)= 10.11%
Citigroup Capital has had major debt restructurings in the last 5 years. They are now in the bottom 2% of their portfolios. In June 2014, Citigroup restructured $4.2 trillion in its junior debt. For comparison, it restructuraged over the same time period of $12 billion, under an equity ratio of 15.7%. All that has changed from an equity ratio of 36% last September, to 16-35% in May 2015. The number of senior debt restructures is, on average, more than one per year. In late 2012-2013, the number of restructurings was only a handful of the total. The number of senior debt restructurings is, on average, a ratio of only over 4%.
Over the last two years, CITIC has had an estimated net loss of $1.8 trillion and an estimated senior debt of $14.6 trillion while the total net loss to the public has been $8.2 trillion and $9.8 trillion. In a statement about the changes, one senior law professor referred the matter to senior counsel of CITIC who noted the “total net loss has been very large. I am concerned that one cannot fully put all the pieces together knowing the number of senior restructured debts and the extent of the total loss that CITIC will have over the next several years”.
With regard to the proposed reforms on senior debt and senior-backed debt, senior law professor Eric Hamer suggests taking the following key steps:
First, divest your stock repurchase funds from the CITIC’s Senior Debt Restructuring Group.
First, sell all of CITIC’s junior debt at a discount to its own revenue.
Second, divest from all of the company’s junior debt at a discount to CITIC’s revenue, and the value generated by senior-backed debt.
Third, sell all senior-backed debt in CITIC’s preferred market as a dividend.
CITIC’s current revenue is less than 2% of the value of its revenue-generating activities, so divest from that amount rather than the CITIC preferred market as a dividend payment. This has been accomplished through an increased discount to CITIC revenue on the CITIC Senior Debt Restructuring Group’s preferred market.
I am confident that senior law professor Eric Hamer will consider the recommendations herein to ensure that senior law professors have the confidence to make the necessary divestments to address the potential for revenue loss. In this way, you benefit from having a greater level of leverage in financial markets, to make the divestment process smoother and cheaper.
| Proceeds were from selling CITIC securities (the current market) to offset earnings from CITIC business. | Proceeds from selling certain derivative instruments (the current market) to offset annual expenses related to the capital lease payments paid. Includes expenses related to the initial capital lease payments paid. Includes expense related to capital purchase financing, capital lease repayments, and all other income and expense taxes that are paid by the seller or buyer. All costs associated with capital lease repayments will be met by the CITIC Chief Executive Officer, who will work to ensure that profits and expenses are being recorded in the CITIC preferred debt Restructuring Group. Excludes interest, and is non-refundable. | Proceeds were from selling certain types of CITIC securities (the current market) to offset earnings from CITIC business. | Proceeds from selling certain types of CITIC convertible securities (the current market) to offset earnings from CITIC business. | Proceeds from selling certain types of CITIC securities (the current market) to offset taxable income earned in the CITIC preferred debt Restructuring Group. | Proceeds from selling all CITIC structured debt issuances (the current market) to offset taxable income earned in the CITIC preferred debt Restructuring Group. | Proceeds from selling certain types of CITIC convertible bonds (the current market) to offset taxable income earned in the CITIC preferred debt Restructuring Group. | |||||||||
Proceeds were from selling certain types of nonprepaid senior secured convertible debt (the current market) to offset earnings from CITIC business. It is unclear if this is related to a payment of any kind, but this is the only specific nonprepaid senior secured convertible debt that we have held.
In the past, there has been a substantial increase in CITIC and senior secured convertible debt. Given the current growth of our business, including a strong operating base and a diversified sales operation, our stock price has increased significantly and dividend payments have increased substantially. We plan on
The former has been the most influential decision-maker because it was the main decision-maker. This is important because senior law professor Hamer’s decision-making style is to make decisions and make decisions that have little or no accountability and few or none of the authority and accountability to have the authority that he or she deserves. This is especially true when one of the most influential decisions-making body that CITIC holds (the SEC) is CITIC.
Second, divest of any company’s senior debt in the common stock of the United States of America of any CITIC Incorporated stockholder, or any part thereof, at a fair
Citigroup Capital has had major debt restructurings in the last 5 years. They are now in the bottom 2% of their portfolios. In June 2014, Citigroup restructured $4.2 trillion in its junior debt. For comparison, it restructuraged over the same time period of $12 billion, under an equity ratio of 15.7%. All that has changed from an equity ratio of 36% last September, to 16-35% in May 2015. The number of senior debt restructures is, on average, more than one per year. In late 2012-2013, the number of restructurings was only a handful of the total. The number of senior debt restructurings is, on average, a ratio of only over 4%.
Over the last two years, CITIC has had an estimated net loss of $1.8 trillion and an estimated senior debt of $14.6 trillion while the total net loss to the public has been $8.2 trillion and $9.8 trillion. In a statement about the changes, one senior law professor referred the matter to senior counsel of CITIC who noted the “total net loss has been very large. I am concerned that one cannot fully put all the pieces together knowing the number of senior restructured debts and the extent of the total loss that CITIC will have over the next several years”.
With regard to the proposed reforms on senior debt and senior-backed debt, senior law professor Eric Hamer suggests taking the following key steps:
First, divest your stock repurchase funds from the CITIC’s Senior Debt Restructuring Group.
First, sell all of CITIC’s junior debt at a discount to its own revenue.
Second, divest from all of the company’s junior debt at a discount to CITIC’s revenue, and the value generated by senior-backed debt.
Third, sell all senior-backed debt in CITIC’s preferred market as a dividend.
CITIC’s current revenue is less than 2% of the value of its revenue-generating activities, so divest from that amount rather than the CITIC preferred market as a dividend payment. This has been accomplished through an increased discount to CITIC revenue on the CITIC Senior Debt Restructuring Group’s preferred market.
I am confident that senior law professor Eric Hamer will consider the recommendations herein to ensure that senior law professors have the confidence to make the necessary divestments to address the potential for revenue loss. In this way, you benefit from having a greater level of leverage in financial markets, to make the divestment process smoother and cheaper.
| Proceeds were from selling CITIC securities (the current market) to offset earnings from CITIC business. | Proceeds from selling certain derivative instruments (the current market) to offset annual expenses related to the capital lease payments paid. Includes expenses related to the initial capital lease payments paid. Includes expense related to capital purchase financing, capital lease repayments, and all other income and expense taxes that are paid by the seller or buyer. All costs associated with capital lease repayments will be met by the CITIC Chief Executive Officer, who will work to ensure that profits and expenses are being recorded in the CITIC preferred debt Restructuring Group. Excludes interest, and is non-refundable. | Proceeds were from selling certain types of CITIC securities (the current market) to offset earnings from CITIC business. | Proceeds from selling certain types of CITIC convertible securities (the current market) to offset earnings from CITIC business. | Proceeds from selling certain types of CITIC securities (the current market) to offset taxable income earned in the CITIC preferred debt Restructuring Group. | Proceeds from selling all CITIC structured debt issuances (the current market) to offset taxable income earned in the CITIC preferred debt Restructuring Group. | Proceeds from selling certain types of CITIC convertible bonds (the current market) to offset taxable income earned in the CITIC preferred debt Restructuring Group. | |||||||||
Proceeds were from selling certain types of nonprepaid senior secured convertible debt (the current market) to offset earnings from CITIC business. It is unclear if this is related to a payment of any kind, but this is the only specific nonprepaid senior secured convertible debt that we have held.
In the past, there has been a substantial increase in CITIC and senior secured convertible debt. Given the current growth of our business, including a strong operating base and a diversified sales operation, our stock price has increased significantly and dividend payments have increased substantially. We plan on
The former has been the most influential decision-maker because it was the main decision-maker. This is important because senior law professor Hamer’s decision-making style is to make decisions and make decisions that have little or no accountability and few or none of the authority and accountability to have the authority that he or she deserves. This is especially true when one of the most influential decisions-making body that CITIC holds (the SEC) is CITIC.
Second, divest of any company’s senior debt in the common stock of the United States of America of any CITIC Incorporated stockholder, or any part thereof, at a fair