The Logic Way of Computing a Clean Invested Capital Cost Factor & Clean Discount Factor
Bond Rate is devised to suppress Inflation Rate.
Inflation Rate reduces the Buying Power of Equity and Debt.
Dividend Yield could offset/cancel out/counteract the Inflation Rate.
.
Definition:
Clean Invested Capital Cost
= CICC
.
Discounted Value of Nth Year
= [ EPS or FCFps of Nth Year ] / [ CICC Factor ]^N
.
Clean Invested Capital Cost Factor (If Dividend is fully reinvested at Intrinsic Value to offset the inflation rate)
=
{
[1 + Bond Ratio]
×
[1 + D/E × (1 + Prime_Ratio + Spread)]
÷
[1 + D/E]
}
.
Note :
Value Constructive is a situatio where:
Economic Strength > Clean Invested Capital Cost
where,
Economic Strength
= ROIC, ROA, √(ROA×ROIC)
.
For example :
.
(A)
PDD
D/E = 3%
Bond Rate = 4.586 %
Commercial Prime Rate = 7.25 %
Spread = 3 %
.
Clean Invested Capital Cost Factor
= { 1.04586×(1 + 0.03×1.1025)÷(1+0.03) }
= 1.048982349
=>
Clean Invested Capital Cost (Rate, %)
= 4.8982349 %
.
(B)
Sea Limited
D/E = 43.3 %
Bond Rate = 4.586 %
Commercial Prime Rate = 7.25 %
Spread = 3 %
.
Total Equity > Debt :
Clean Invested Capital Cost Factor
= Clean Discount Factor
= { 1.04586×(1 + 0.433×1.1025)÷(1+0.433) }
= 1.0782521015
=>
Clean Invested Capital Cost (Rate, %)
= 7.82521015 %