Hi Prof., First of all many thanks for the lectures. It is very helpful. I have a doubt related to the topic : As shown in the table variation of Beta for the Disney with Debt to Equity Ratio. Generally, Equity has higher rate of expected return compared to Debt ( I think so, can be a wrong assumption ) considering this, if Debt to Equity ratio has increased then we expect the hurdle rate to go down as Hurdle Rate = (Debt percentage)* (Return expected on Debt) + (Equity percentage)*(ROE) But if Beta is increasing, Risk is increasing, the hurdle rate should go up - > which goes against previous response. I also have feeling that if growth company like LinkedIn, Google or Disney took very high Debt then they become risky as they can't make sure that they will have the steady cash flow to make the payments to debtors, Hence Beta should go up. So does it mean when the Debt to Equity ratio is optimal then Beta will be lowest otherwise it will increase even if Debt increases or decreases. Please understand me these conflicting concepts.
2 years later and I'll answer. Debt is a fixed cost, that's why it increases risk - fixed costs, of any kind, increase risk. Equity, however, doesn't demand dividends every month, or even demand dividends at all. Remeber that the "return" of a share also computes the price going up, not only dividends. If your company doesn't want to pay dividends, it doesn't even have to do that. Equity expects higher returns EXACTLY because the company doesn't have an obligation to pay them anything. They only pay you if they want to, and if they're "in the green". A bank doesn't have to worry about that at all, they'll always receive the money.
Last 1 minute of the lecture just blew my mind. Thanks
The Jordan of Finance... The Mayweather Jr. of Finance, TBE.
Thankyou Sir!
Table of Disney's beta related to D/E ratio (example) - 11:41
Hi Prof.,
First of all many thanks for the lectures. It is very helpful.
I have a doubt related to the topic :
As shown in the table variation of Beta for the Disney with Debt to Equity Ratio.
Generally, Equity has higher rate of expected return compared to Debt ( I think so, can be a wrong assumption )
considering this, if Debt to Equity ratio has increased then we expect the hurdle rate to go down as
Hurdle Rate = (Debt percentage)* (Return expected on Debt) + (Equity percentage)*(ROE)
But if Beta is increasing, Risk is increasing, the hurdle rate should go up - > which goes against previous response.
I also have feeling that if growth company like LinkedIn, Google or Disney took very high Debt then they become risky as they can't make sure that they will have the steady cash flow to make the payments to debtors, Hence Beta should go up. So does it mean when the Debt to Equity ratio is optimal then Beta will be lowest otherwise it will increase even if Debt increases or decreases.
Please understand me these conflicting concepts.
2 years later and I'll answer. Debt is a fixed cost, that's why it increases risk - fixed costs, of any kind, increase risk. Equity, however, doesn't demand dividends every month, or even demand dividends at all. Remeber that the "return" of a share also computes the price going up, not only dividends. If your company doesn't want to pay dividends, it doesn't even have to do that. Equity expects higher returns EXACTLY because the company doesn't have an obligation to pay them anything. They only pay you if they want to, and if they're "in the green". A bank doesn't have to worry about that at all, they'll always receive the money.
Novice finance student here: at 1:23 where does Tata's risk premium of 7.19% come from?
Are Employees and Labor fixed costs?
His intelligence is great aswath damodarwn taoist cloud Daoist Dayz
He seems kinda tipsy in this video