Value Line

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Value Line
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JNJ WACC from Bloomberg
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WACC for PG 2004
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Bond YTMs by Credit Rating
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Bond Yields, Nov. 17, 2004

• 10 year AAA4.95, A5.09,BB6.62
• Treasury 4.26
• 20 year AAA5.5, A5.68, BB NA
• Treasury 4.70
• Source The Outlook, SP.

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Cost of Equity for JNJ

• K RFR B (Km RFR)
• 5 .68 (9 - 5) 7.72
• (the RFR should be 4.26LT Treas.)
• MRP from Bloomberg is 5.45, I used 4
• K D1/P expected g (from VL est. div g)
• 1.1 / 57.66 9 10.9
• K Bond YTM (3 to 5) 4.7 3 7.7
• (I normally use a BRP of 4, but it should be
  smaller for JNJ, maybe 3)

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WACC for JNJ

• Cap BV MV
• LTD 2500 2500
• Eq 31750 137286
• Tot. 34250 139786
• Using MV wts 2 98

• BV Wt. Cost x 1-tx Prod.
• 40
• 14 4.7 0.39
• 86 7.7 6.63
• WACC bv 7.03
• WACC mv 7.37

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Why is the WACC for JNJ different from the WACC
for PG?

• Capital Structure is one difference
• Why does JNJ use less debt than PG?
• The following slides show factors that are
  important to firms as they target a particular
  capital structure.

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Other factors to consider when establishing the
firms target capital structure

• Industry average debt ratio
• TIE ratios under different scenarios
• Lender/rating agency attitudes
• Reserve borrowing capacity
• Effects of financing on control
• Asset structure
• Expected tax rate

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How would these factors affect the target capital
structure?

• Sales stability?
• High operating leverage?
• Increase in the corporate tax rate?
• Increase in the personal tax rate?
• Increase in bankruptcy costs?
• Management spending lots of money on lavish perks?