beta(asset) = (E/E+D)beta(equity) + (D/E+D)beta(debt)

Assumption 1
Without changing capital structure (Constant)
beta(debt) = 0

beta(asset) = (E/E+D)beta(equity)

Company
D&B Shoe Company
Marina Wilderness
General Shoe Corp.
Kinsley Coulter Products
Victory Athletic
Surfside Footwear
Alpine Company
Heartland Outdoor Footware
Templeton Athletic
Average

Equity
Market Value
420,098
1,205,795
533,463
165,560
35,303,250
570,684
1,056,033
1,454,875
397,709

Net
Debt (1)
125,442
(91,559)
171,835
82,236
7,653,207
195,540
300,550
(97,018)
169,579

D/E
29.9%
-7.6%
32.2%
49.7%
21.7%
34.3%
28.5%
-6.7%
42.6%
24.9%

Equity
Beta
2.68
1.94
1.92
1.12
0.97
2.13
1.27
1.01
0.98

Assumption 2
With changing capital structure
beta(debt) = 0

beta(asset) = (E/E+ net_Debt(1-t))beta(equity)

Company
D&B Shoe Company
Marina Wilderness
General Shoe Corp.
Kinsley Coulter Products
Victory Athletic
Surfside Footwear
Alpine Company
Heartland Outdoor Footware
Templeton Athletic
Average

Equity
Market Value
420,098
1,205,795
533,463
165,560
35,303,250
570,684
1,056,033
1,454,875
397,709

Net
Debt (1)
125,442
(91,559)
171,835
82,236
7,653,207
195,540
300,550
(97,018)
169,579

D/E
29.9%
-7.6%
32.2%
49.7%
21.7%
34.3%
28.5%
-6.7%
42.6%
24.9%

Equity
Beta
2.68
1.94
1.92
1.12
0.97
2.13
1.27
1.01
0.98

Note
Constant capital structure (Assumption 1) was used based on Liedtkes choice of a WACC based on a 20% D/V ratio

Hence

beta (asset)=1.28

Unlevered

beta (equity)= (V/E)*beta(asset)

Relevering

beta (equity)= (1/0.8)*1.28

beta (equity)

CAPM
Re = Rf + beta (equity) * EMRF
Rf
EMRF
beta (equity)
Re

4.93
5
1.6
12.93

WACC
D/V
E/V
D/E
Equity Beta
Asset Beta
COE
COD
tax

20%
80%
25%
1.6
1.28
12.93%
6%
40%
WACC

11.0640%

1.6

Levered

E/V
77.0060
108.2172
75.6365
66.8130
82.1838
74.4800
77.8451
107.1449
70.1070

Asset
Beta
2.06
2.10
1.45
0.75
0.80
1.59
0.99
1.08
0.69
1.28

Value(V)
495,363.31
1,150,859.99
636,563.72
214,901.13
39,895,173.95
688,008.46
1,236,363.33
1,396,664.34
499,456.41

E/V
0.8481
1.0477
0.8380
0.7704
0.8849
0.8295
0.8541
1.0417
0.7963

Asset
Beta
2.27
2.03
1.61
0.86
0.86
1.77
1.08
1.05
0.78
1.37

V=(E+ net_Debt(1-t))

on a 20% D/V ratio

FCFF=EBIT(1-T) - (Capex + Dep -Change in WC)

2007

Consolidated Revenue
Less: Operating Expenses
Less: Corporate Overhead
Consolidated Operating Income (EBIT)
Less Tax@40%
EBIT(1-T)
Less: Estimated Change in Working Capital
Less: Estimated Capital Expenditures
Add: Estimated Depreciation
FCFF

2008

2009

2010

2011

479329.1 489028.1
532137 570319.2 597716.8
423836.3 427333.4 465110.1 498534.7
522522
8487.061 8658.794 9422.085 10098.14 10583.25
47006
53036
57605
61686
64612
18802.3 21214.39 23041.92 24674.53 25844.64
28203
31822
34563
37012
38767
4,567
2,649
9,805
8,687
6,233
11,983
12,226
13,303
14,258
14,943
9,587
9,781
10,643
11,406
11,954
21240
26727
22097
25473
29545

Rounding off to next interger value

Rounding off to next interger value

From Balancesheet
Refer to WC Calculation

Select Balance Sheet Accounts

Cash Used in Operations
Accounts Receivable
Inventory
Prepaid Expenses

2006
10,676
45,910
73,149
10,172

Property, Plant & Equipment

Trademarks & Other Intangibles
Goodwill
Other Assets

32,618
43,853
43,051
11,162

Liabilities
Accounts Payable
Accrued Expenses

16,981
18,810

Deferred Taxes
Pension Obligation

11,654
9,080

Working Capital Calculation

Working Capital
Change in WC

2006
104,117

2007
4,161
47,888
83,770
14,474

2008
4,195
48,857
85,465
14,767

2009
4,566
53,164
92,999
16,069

2010
4,894
56,978
99,672
17,222

2011
5,130
59,715
104,460
18,049

35,015
0
43,051
11,162

37,460
0
43,051
11,162

40,120
0
43,051
11,162

42,972
0
43,051
11,162

45,961
0
43,051
11,162

18,830
22,778

18,985
22,966

20,664
24,996

22,149
26,792

23,214
28,081

11,654
9,080

11,654
9,080

11,654
9,080

11,654
9,080

11,654
9,080

2007
108,684
4,567

2008
111,333
2,649

2009
121,138
9,805

2010
129,826
8,687

2011
136,059
6,233

Growth Rate = ROC*RIR

RIR=Rinvestment Rate

ROC = EBIT(1-T)/(E+D)
RIR = Change in WC + Change in Capex - Depreciation

We have to calculate the Long term growth rate starting from 2011

EBIT(1-T)
Invested Capital
ROC

2011
38767
331381
11.7%

Net Reinvestment
EBIT(1-T)

9,222
38767

RIR

23.8%

Long Term Growth Rate

2.7829%

WACC
Growth Rate

11.0640%
2.7829%

1
2007

2
2008

Consolidated Revenue
Less: Operating Expenses
Less: Corporate Overhead
Consolidated Operating Income (EBIT)

479329.1 489028.1
423836.3 427333.4
8487.061 8658.794
47006
53036

Less Tax@40%
EBIT(1-T)
Less: Estimated Change in Working Capital
Less: Estimated Capital Expenditures
Add: Estimated Depreciation
FCFF
PVIF
PV of FCFF
Terminal Value
SUM of PV if FCFF
PV (Terminal Value)

18802.3 21214.39
28203
31822
4,567
2,649
11,983
12,226
9,587
9,781
21240
26727
0.90038 0.81069
19123.97 21667.48
91145.1
216994.8

Enterprise Value W/O Cash

Add: Ending Cash of 2006

308139.9
10,676

Total Enterprise Value

318,816

3
2009

4
2010

5
2011

532137 570319.2 597716.8

465110.1 498534.7
522522
9422.085 10098.14 10583.25
57605
61686
64612
23041.92 24674.53 25844.64
34563
37012
38767
9,805
8,687
6,233
13,303
14,258
14,943
10,643
11,406
11,954
22097
25473
29545
0.72993 0.65721 0.59174
16129.48 16741.09 17483.08
366704.2

Rounding off to next interger value

Rounding off to next interger value

From Balancesheet
Refer to WC Calculation in FCFF

Sensitivity Analysis
0%
360978
287871
259839
239334

Long Term Growth Rate

2.78%
3%
4%
505776
523852
632434
365682
374335
422402
318816
325130
359217
286576
291491
317569

8%
10%
WACC
11.06%
12%

Key Takeaways
There is a lot of various within the small range of
Growth Rate and WACC.