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Q: In the DCF Spreadsheet, under the weighted average cost of capital, the risk free rate, long term 10 year treasury stated 4.32%. Should I go to http://www.google.com/finance on the bottom right under Bonds and use the 10 years 2.95% as the data?
A: Regarding the risk free rate, we typically use a weighted average of the historical 10-year Treasury and the spot rate, as the current spot rate is relatively low at this time, in our opinion. You should be able to get the spot rate from Google as you suggest or from Yahoo http://finance.yahoo.com/bonds. We believe that using only the spot rate for the 10-year Treasury (and not a weighted average) will result in the systematic overvaluation of companies, however.
Q: For the (Fin sub debt) & (Pension Underfundedness) what are those items? Do you have any example that you can show me?
A: For the (Fin sub debt) & (Pension Underfundedness) considerations -- these are measures that are often found within the industrials sector for operating companies. For example, Boeing has a finance sub, Boeing Capital Corp., which generates income via financing activities, and such activity needs to be accounted for in a FCFF model separately. Re pensions, a firm's underfundedness would need to be accounted for in the model (that is, its projected benefit obligation less its plan assets).
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| Posted: 29 Jun 2011 19:27 Back to top |
