Cost of Equity Capital: Entering Inputs to MCPM

Contents - Index

Cost of Equity Capital: Entering Inputs to MCPM
©2009 OS Financial Trading System

To complete this exercise we now use the MCPM calculator in the FTS Real Time Client:
Again select the Parameters menu item, click on List All, select IBM and then select MCPM Model from the Parameter type and the drop down for input fields are as depicted below:

The inputs are:
i. Bond Yield to Maturity
ii. Dividend yield
iii. Volatility
iv. Time to maturity for the corporate debt
Now the four inputs can be entered as follows:

The calculated cost of equity capital is:

Cost of equity capital = 9.85%.
Re-calulate the Intrinsic Value for IBM
By re-entering this into the FCFE calculator by modifying the two cost of equity capital entries:

Our new estimate for IBM (under very conservative growth assumptions):

That is, our assessment of intrinsic value for IBM is now 145.35 but this still exceeds significantly the current spot price.