Page 9 - PowerPoint Presentation

WEIGHTED AVERAGE COST OF CAPITAL 9 (WACC) Range Range Range Range Low Low High High Low High Low High (a) (a) 10.0% 10.0% 10.0% 10.0% Estimated All-In Cost for Company (a) 10.0% 10.0% Estimated All-In Cost for Company Estimated All-In Cost for Company (a) I. Cost of Debt (Kd) I. Cost of Debt (Kd) I. Cost of Debt (Kd) Estimated All-In Cost for Company 10.0% 10.0% I. Cost of Debt (Kd) (b) (b) 35.0% 35.0% Marginal Tax Rate (b) 35.0% 35.0% 35.0% 35.0% Marginal Tax Rate Marginal Tax Rate (b) 35.0% Marginal Tax Rate 35.0% Kd = 10.0% * (1- 35.0%) = Kd = 10.0% * (1- 35.0%) = 6.5% 6.5% 6.5% Kd = 10.0% * (1- 35.0%) = 6.5% 6.5% 6.5% 6.5% Kd = 10.0% * (1- 35.0%) = 6.5% (c) (c) 3.47% 3.47% 3.47% Risk Free Rate (20-year T-Bond Yield) (c) 3.47% 3.47% Risk Free Rate (20-year T-Bond Yield) 3.47% Risk Free Rate (20-year T-Bond Yield) (c) Risk Free Rate (20-year T-Bond Yield) 3.47% 3.47% (d) (d) 0.99 Target Beta (d) 0.99 0.99 Target Beta 0.99 0.99 0.99 Target Beta (d) 0.99 0.99 Target Beta (e) (e) 5.1% 7.1% 7.1% 5.1% Market Risk Premium (e) 5.1% 7.1% Market Risk Premium Market Risk Premium (e) II. Cost of Equity (Ke) II. Cost of Equity (Ke) Market Risk Premium 5.1% 7.1% II. Cost of Equity (Ke) II. Cost of Equity (Ke) Small Stock Premium 3.88% Small Stock Premium (f) (f) (f) 3.88% 3.88% 3.88% 3.88% 3.88% Small Stock Premium (f) 3.88% 3.88% Small Stock Premium 12.4% 12.4% Ke = 3.5% + (0.99 * 5.1%) + 3.9% = 12.4% Ke = 3.5% + (0.99 * 5.1%) + 3.9% = Ke = 3.5% + (0.99 * 5.1%) + 3.9% = Ke = 3.5% + (0.99 * 5.1%) + 3.9% = 12.4% Ke = 3.5% + (0.99 * 7.1%) + 3.9% = 14.4% 14.4% 14.4% Ke = 3.5% + (0.99 * 7.1%) + 3.9% = Ke = 3.5% + (0.99 * 7.1%) + 3.9% = 14.4% Ke = 3.5% + (0.99 * 7.1%) + 3.9% = (k) (k) 5.00% Private Company Liquidity Risk Premium (k) 5.00% 10.00% 10.00% 10.00% 5.00% Private Company Liquidity Risk Premium (k) 5.00% 10.00% Private Company Liquidity Risk Premium Private Company Liquidity Risk Premium (g) (g) 12.7% 12.7% Target Debt to Total Cap. Ratio Target Debt to Total Cap. Ratio (g) 12.7% 12.7% 12.7% 12.7% Target Debt to Total Cap. Ratio (g) 12.7% 12.7% Target Debt to Total Cap. Ratio 87.3% 87.3% Implicit Market Equity to Market Cap. Ratio Implicit Market Equity to Market Cap. Ratio 87.3% 87.3% Implicit Market Equity to Market Cap. Ratio 87.3% 87.3% Implicit Market Equity to Market Cap. Ratio 87.3% 87.3% III. WACC (K) III. WACC (K) III. WACC (K) III. WACC (K) 16.0% 16.0% K = (6.5% * 12.7%) + (12.4% * 87.3%) = 16.0% K = (6.5% * 12.7%) + (12.4% * 87.3%) = K = (6.5% * 12.7%) + (12.4% * 87.3%) = K = (6.5% * 12.7%) + (12.4% * 87.3%) = 16.0% 22.1% 22.1% K = (6.5% * 12.7%) + (14.4% * 87.3%) = 22.1% K = (6.5% * 12.7%) + (14.4% * 87.3%) = K = (6.5% * 12.7%) + (14.4% * 87.3%) = K = (6.5% * 12.7%) + (14.4% * 87.3%) = 22.1% ( $ in millions) ( $ in millions) ( $ in millions) ( $ in millions) Small Small Small Small Stock Mkt. Mkt. Debt to Debt to Stock Mkt. Debt to Total Stock Unlevered Total Total Unlevered Unlevered Total Unlevered Stock Mkt. Debt to (c) (c) WACC Cap Beta (c) WACC Selected Companies Cap. Cap. Cap Selected Companies Cap. (c) Mkt Cap Cap Premium Beta (j (j (j ) ) (j ) ) WACC (j (j (j ) ) (j ) ) Selected Companies Mkt Cap Mkt Cap Beta Premium Premium Premium Beta Cap. WACC Selected Companies Mkt Cap Cap Rosetta Stone Inc. [REDACTED] $275 0.0% $275 3.88% NA NA - - - - NA Rosetta Stone Inc. Rosetta Stone Inc. $275 NA NA NA $275 $275 3.88% $275 3.88% NA 0.0% NA NA 0.0% NA Rosetta Stone Inc. $275 0.0% NA $275 NA 3.88% IV. Current WACC & IV. Current WACC & IV. Current WACC & [REDACTED] IV. Current WACC & 333 333 1.01 1.01 12.5% 12.5% 3.88% 3.88% 14.5% 14.5% Renaissance Learning, Inc. Renaissance Learning, Inc. 333 0.0% 0.0% 333 0.0% 3.88% 1.01 12.5% 333 Renaissance Learning, Inc. 14.5% 333 Target Beta and Capital Target Beta and Capital Renaissance Learning, Inc. 333 0.0% 333 3.88% 1.01 12.5% - - - - 14.5% Target Beta and Capital Target Beta and Capital [REDACTED] 56 Scientific Learning Corporation Scientific Learning Corporation 0.43 0.0% 0.0% 9.5% 9.5% 0.43 10.4% 56 3.88% 3.88% 56 10.4% 56 56 9.5% 0.43 Scientific Learning Corporation 3.88% 0.0% 10.4% 56 Structure Structure Scientific Learning Corporation 56 0.0% 56 3.88% 0.43 9.5% - - - - 10.4% Structure Structure [REDACTED] 3.88% 3.88% NA NA DynaVox, Inc, 49 94.1% 95 3.88% NA NA - - - - NA NA NA NA DynaVox, Inc, 49 95 95 49 94.1% 94.1% DynaVox, Inc, NA DynaVox, Inc, NA 49 94.1% 95 NA NA 3.88% [REDACTED] K12 Inc 0.80 K12 Inc 0.80 K12 Inc 0.80 K12 Inc [REDACTED] 1,035 4.0% 1,076 1.76% 0.80 9.3% - - - - 10.9% 4.0% 1,076 1,035 9.3% 10.9% 1,076 1,076 10.9% 10.9% 9.3% 9.3% 4.0% 4.0% 1.76% 1,035 1,035 1.76% 1.76% 12.8% 12.8% 15.0% 1.21 15.0% 31.8% 31.8% 1.21 3.88% 91 91 3.88% 69 69 Encore Softw are Inc (Navarre) Encore Softw are Inc (Navarre) Encore Softw are Inc (Navarre) 69 31.8% 91 3.88% 1.21 12.8% - - - - 15.0% 31.8% 1.21 Encore Softw are Inc (Navarre) 3.88% 15.0% 91 69 12.8% Mean Mean 12.7% 12.7% 12.7% 23.5% Mean 3.5% 0.86 11.0% 12.7% 23.5% 23.5% 23.5% Mean 11.0% 3.5% 11.0% 11.0% 0.86 0.86 0.86 3.5% 3.5% Median 3.9% 0.90 0.90 12.7% 12.7% 3.9% 11.0% 11.0% 0.0% Median 3.9% 0.90 11.0% 12.7% 0.0% Median 0.0% 0.90 0.0% 11.0% 3.9% 12.7% Median