##### ITC556 Database Systems Assignment Help

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The cost of equity is built on three factors; the risk free rate, the market risk premium and a company-specific risk adjustment. The most commonly used method for this estimate is the capital asset pricing model (CAPM). To determine the CAPM, we need to estimate a risk free rate, the market risk premium and the market beta.

**(A).** To determine the risk free rate, please use Treasury data from the “Select Market Data” spreadsheet . On the “Yields” tab, you will find maturities for U.S. and German Treasury rates. For Henkel AG which treasury rate at which maturity is appropriate to use in valuing the company?

In selecting the best treasury rate and time period for Henkel AG, the maturity period that is most suitable for valuing the company is 10 years at a rate is 5.23. This is arrived at by first determining Henkel AG;s credit rating which is rated A- by the Standard and Poor (S&P) rating agency (REF 2009). However, this rating level is not used within the European corporate rating system therefore interpolation between US and European rating systems is required.

A comparison against a European rating of A over a 10 year period holds a yield rate 4.52. These treasury rates may be used in determining the value of the company in each respective market. It should be noted that 10 years is a period outside the usual short term period which is normally classified as 5 years or less (REF). This long time period allows for an averaging of otherwise volatile short term fluctuations in short term periods

Recent reporting from Henkel’s website shows that the rating has moved from A- to A showing an improvement and a likely wood that most investor and firm will want to do business with Henkel. These also indicate that Henkel has gain trustworthiness from lenders which it can use to borrow or buy more bonds to expand its business group. It is important to note that 10 years German Eurobond is preferred when one is to value a European company since German bonds have higher liquidity and lower credit risk than those of the rest of European countries. It is also important to note that past performance of any indicator is no guarantee of future performance (REF).

**(B). **To determine Henkel’s corporate beta, unlever (and relever) the ordinary least squares (OLS) market beta for each company in the European Household and Personal Care segment. Prices can be found on the “Prices” tab of the “Select Market Data” spreadsheet. To determine the OLS market beta, regress 10 year monthly returns against the MSCI World Index denominated in the same currency. In Excel, this can be done using the SLOPE formula. Next, unlever the market beta using each company’s yearend debt to equity ratio and the formula bu=be/(1+D/E). To determine Henkel’s corporate beta, relever the average industry beta using Henkel’s year end debt-to-equity ratio. Repeat this process for each of Henkel’s divisions.

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**(C).** Assume the market risk premium equals 5 percent.

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Henkel does not carry debt beyond 5 years. To determine the cost of debt:

**(A).** For Henkel AG, which Treasury rate at which maturity is most appropriate to use in valuing the cost of debt of the company?

**Answer here**

**(B).** Add a default premium based on the company’s rating by Standard & Poor’s. Yields by credit rating can be found on the “Yields” worksheet of the “Select Market Data” spreadsheet. Henkel reports its debt rating on it’s investor relations web site at www.henkel.com/investor-relations/credit-ratings-11952.htm. If the company’s rating is between reported portfolios, interpolate between the nearest ratings.

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**(C).** Determine Henkel’s marginal tax rate, use the tax reconciliation table in the annual report. Set the marginal tax rate equal to the “Tax rate on income.”

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**(D).** To complete the cost of capital, weight the after tax cost of debt and cost of equity using the company’s year-end capital structure (found in the “Select Market Data” spreadsheet.

**Answer here**