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Module 6: Cost of Capital and Valuation Andrew DePalma February 12, 2014

Module 6: Cost of Capital and Valuation Andrew DePalma February 12, 2014. ANF 1-Year Chart. Weighted Average Cost of Capital. Multiply the after-tax cost of debt by the portion of enterprise value financed by the debt holders

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Module 6: Cost of Capital and Valuation Andrew DePalma February 12, 2014

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  1. Module 6: Cost of Capital and Valuation Andrew DePalma February 12, 2014

  2. ANF 1-Year Chart

  3. Weighted Average Cost of Capital • Multiply the after-tax cost of debt by the portion of enterprise value financed by the debt holders • Multiply the cost of equity by the portion of enterprise value financed by the equity holders • Add the two products together • Market values are used for the WACC calculation instead of intrinsic values, because intrinsic values are unobservable

  4. Risk • Diversifiable Risk • Risk that can be diversified away by the investors • Diversification refers to the practice of holding stocks and bonds with different risk profiles • Non-Diversifiable Risk • Difficult to determine whether a risk is diversifiable or non- diversifiable • In theory, if an investor held the market portfolio, diversifiable risk would be removed

  5. Capital Asset Pricing Model • Expresses the expected return on a particular asset as the sum of the risk-free rate of return, beta risk, and stock specific risk

  6. Regression Output

  7. Bloomberg BETA

  8. Cost of Debt Capital • Using the 2012 RNFL of 1.53% appears to be a reasonable assumption for after-tax cost of debt

  9. Enterprise Capital • ANF has debt of 200.4 million (NFL is negative) • Market capitalization is 2,819 million • Enterprise Capital = 3,019.4

  10. Bloomberg WACC

  11. Questions?

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