Академический Документы
Профессиональный Документы
Культура Документы
+
N* Face Value
(1+ r)
N
(
(
(
Coupon
t
(1+ r)
t
t =1
t =N
+
Face Value
(1+ r)
N
(
(
(
Aswath Damodaran 134
Duration of a Firms Assets
This measure of duration can be extended to any asset with expected
cash flows on it. Thus, the duration of a project or asset can be
estimated in terms of the pre-debt operating cash flows on that project.
where,
CFt = After-tax operating cash flow on the project in year t
Terminal Value = Salvage Value at the end of the project lifetime
N = Life of the project
The duration of any asset provides a measure of the interest rate risk
embedded in that asset.
Duration of Project /Asset =
dPV/PV
dr
=
t *CF
t
(1+r)
t
t=1
t =N
+
N* Terminal Value
(1+ r)
N
(
(
(
CF
t
(1+ r)
t
t =1
t =N
+
Terminal Value
(1+ r)
N
(
(
(
Aswath Damodaran 135
Duration: Comparing Approaches
oP/or=
Percentage Change
in Value for a
percentage change in
Interest Rates
Traditional Duration
Measures
Regression:
oP = a + b (or)
Uses:
1. Projected Cash Flows
Assumes:
1. Cash Flows are unaffected by
changes in interest rates
2. Changes in interest rates are
small.
Uses:
1. Historical data on changes in
firm value (market) and interest
rates
Assumes:
1. Past project cash flows are
similar to future project cash
flows.
2. Relationship between cash
flows and interest rates is
stable.
3. Changes in market value
reflect changes in the value of
the firm.
Aswath Damodaran 136
Operating Income versus Interest Rates
Change in Operating Income = 0.36 + 2.55 (Change in Interest Rates)
(11.28) (0.95)
Generally speaking, the operating cash flows are smoothed out more
than the value and hence will exhibit lower duration that the firm
value.
Aswath Damodaran 137
Sensitivity to Changes in GNP
The answer to this question is important because
it provides insight into whether the firms cash flows are cyclical and
whether the cash flows on the firms debt should be designed to protect
against cyclical factors.
If the cash flows and firm value are sensitive to movements in the
economy, the firm will either have to issue less debt overall, or add
special features to the debt to tie cash flows on the debt to the firms
cash flows.
Aswath Damodaran 138
Regression Results
Regressing changes in firm value against changes in the GNP over this
period yields the following regression
Change in Firm Value = 0.74 -7.82 ( GDP Growth)
(2.05) (0.65)
Conclusion: The Home Depot is counter-cyclical (?)
Regressing changes in operating cash flow against changes in GNP
over this period yields the following regression
Change in Operating Income = 0.41 2.25 ( GNP Growth)
(6.86) (1.14)
Conclusion: The Home Depots operating income is slightly less sensitive
to the economic cycle, but also counter-cyclical.
Aswath Damodaran 139
Sensitivity to Currency Changes
The answer to this question is important, because
it provides a measure of how sensitive cash flows and firm value are to
changes in the currency
it provides guidance on whether the firm should issue debt in another
currency that it may be exposed to.
If cash flows and firm value are sensitive to changes in the dollar, the
firm should
figure out which currency its cash flows are in;
and issued some debt in that currency
Aswath Damodaran 140
Regression Results
Regressing changes in firm value against changes in the dollar over
this period yields the following regression
Change in Firm Value = 0.52 + 1.13 ( Change in Dollar)
(2.86) (0.34)
Conclusion: The Home Depots value has not been very sensitive to
changes in the dollar over the last 15 years.
Regressing changes in operating cash flow against changes in the
dollar over this period yields the following regression
Change in Operating Income = 0.35 - 0.14 ( Change in Dollar)
(10.83) (0.24)
Conclusion: The Home Depots operating income has also been
unaffected by changes in exchange rates.
Aswath Damodaran 141
Sensitivity to Inflation
The answer to this question is important, because
it provides a measure of whether cash flows are positively or negatively
impacted by inflation.
it then helps in the design of debt; whether the debt should be fixed or
floating rate debt.
If cash flows move with inflation, increasing (decreasing) as inflation
increases (decreases), the debt should have a larger floating rate
component.
Aswath Damodaran 142
Regression Results
Regressing changes in firm value against changes in inflation over this
period yields the following regression
Change in Firm Value = 0.45 - 23.39 (Change in Inflation Rate)
(2.78) (1.68)
Conclusion: The Home Depots firm value is negatively affected by
increases in inflation.
Regressing changes in operating cash flow against changes in inflation
over this period yields the following regression
Change in Operating Income = 1.40 1.40 ( Change in Inflation Rate)
(10.37) (0.50)
Conclusion: The Home Depots operating income is also negatively
affected by increases in inflation, though the effect is smaller.
Aswath Damodaran 143
Bottom-up Estimates
Change in Firm Value versus
Interest Rates GDP Growth Inflation Currency
Building Supplies -6.56 0.73 -5.11 -1.93
On a bottom-up basis,
The Home Depot should have debt
With a duration of 6.56 years
That is unaffected by economic cycles
Is is fixed rate (Value does not increase as inflation goes up)
In dollars
Aswath Damodaran 144
Analyzing The Home Depots Current Debt
The Home Depots existing debt is almost entirely in the form of long term
leases on U.S. stores.
Consequently, its existing debt is in line with what you would expect the
Home Depot to have.
Aswath Damodaran 145
Analyzing Boeings existing debt
Existing Debt Optimal
Duration 7.55 9.05
Floating Rate Component 12% Low
Foreign Currency Debt 8% 47.24%
Convertible Debt 0% 0%
Boeing should increase its proportion of foreign currency debt and
increase the maturity of its debt shortly.
The optimal debt ratios were estimated based upon bottom-up estimates
for the aerospace and defense businesses.