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Volkswagen Company

  1. 1 Look at the market value of the company’s debt and equity share over the past 3 years.
    1. Have they changed much?
    2. How do you handle short-term debt, net vs. gross debt, and leasings?


From here on suppose that the Debt-to-equity ratio had been constant over the past year. Also suppose that the corporate tax rate was fixed. What was it?

  1. Look at the company’s equity.
    1. What is the company’s cost of equity using the CAPM or another method?
    2. What is the company’s beta?
    3. What is the company’s unlevered beta?
    4. What is the cost of equity for any level of equity between 10 and 100%? (100% equity would mean no debt)
    5. Did you consider that the marginal investor was a well-diversified investor?
    6. If so, justify why and what that implies.
    7. Did you consider that the company might have to pay a higher risk premium because of non-US business?Look at the company’s bonds.
    8. What was the average spread the company paid on its bonds?
    9. What does that mean for its cost of debt going forward?
    10. Come up with a simple model for the cost of debt for high (and maybe lower) counterfactual debt levels.
    11. What would the cost of debt be for any debt ratio between 0 and 100 according to your model?
    12. Did you consider that the company might have to pay a higher risk premium because of non-US business?
      Show the cost of capital for debt, equity, and the company as a whole (WACC)
    13. What Debt-ratio would you target? Why?
    14. What is the value of the tax shield?
    15. Would a change in the capital structure (should you advise so) result in a change in the market value of the company?
      • Why?
      • Who would profit?
      • By how much?

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