Understanding Cost of capital & Capital structure | Candi Carrera | Skillshare

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Understanding Cost of capital & Capital structure

teacher avatar Candi Carrera, Value investor & board director

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Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

6 Lessons (1h 21m)
    • 1. Introduction

    • 2. Exchange of money

    • 3. Returns per asset class

    • 4. Why equity investments vs debt instruments ?

    • 5. Return On Invested Capital

    • 6. Practical examples & conclusion

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About This Class

This investor quicktake course will enable you to have an easy & straightforward understanding of cost of capital, why capital has a cost associated to it and how to calculate the cost of capital. You will also understand the risk vs return difference between various asset classes (debt vs equity).

At the end of this quicktake course, students will be able to differentiate the risk between various asset classes. Furthermore we will practice with Microsoft, Apple, Richemont & Kering and calculate their cost of capital. We will also compare the expected cost of capital with the actual performance on return on invested capital for those 4 companies

Objective of this course is to allow you in a very short period of time (approximately 1 hour) to grasp the essence of cost of capital.

Investing in stocks and acting as a business-owner can be a life-changing experience. Learn from my 20 years experience as an investor running my own investment fund and rapidly move ahead faster with the knowledge I will share with you.

Last but not least by subscribing to this course, you will be entitled & invited to my bi-monthly Live Webinars where you will be able to ask any kind of question.

Many thanks and I appreciate your interest in my course! Hope you will enjoy it

Candi Carrera

Meet Your Teacher

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Candi Carrera

Value investor & board director


Hello. My name is Candi Carrera and I am a value investor for more than 20 years with 90% of my personal savings invested in stocks. My main attitude as value investor is to buy shares as if I would be buying the whole company, acting as a business owner and understanding the business I am investing into.

I keep the remaining 10% as a cash reserve to buy more stocks as market corrections and bear markets happen regularly. During bear markets, investors are depressed and become pessismistic. I take the opportunity during those depressed periods of buying great companies at low prices. As famous investor John Templeton said : "If you want to have a better performance than the crowd, you must do things differently from the crowd".

Through these courses, my personal goal is to... See full profile

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1. Introduction: A comeback investors in this course will introduce you to the very important topic of cost of capital as a value investor for more than 20 years, but also as a board director, I need to deal with this very important subject of cost of capital and return on capital very frequently. As always, I'm reminding you that this course is and this content is for information educational purposes only. And I'm trying just to share my experience as a value investor with you guys. At the very end of the day, it's neither a direct often are solicitation for you to buy or sell on the stock markets. And before moving forward, of course, if you like this course or other of my courses, please be so kind and leave in evolution on the learning platform. Do reminding you that we are using an amusing, a multi-layer learning methods. So the first part obviously is building this course content for you guys, where I'm bringing concepts, explaining you the reasoning behind those concepts. And then we're going to practice those concept on real life examples. And this training we're going to be focusing on for companies which are Microsoft, Apple for the tech world, and carrying and Reshma for the luxury world. Because I think it's important. And if you have taken other of my courses that you practice your eye constantly on Ringo's annual reports, reading those quarterly reports and understanding what is behind that and do the interpretation of it. Then the third part of this multi-layer learning methods is that I'm organizing every four to six weeks a webinar. It's typically on a Saturday where I'm having a two hour seminar with other investors, other students that have taken my courses so that we can exchange on specific topics and you can ask which topic you would like me to cover also in advance when you will get the invitation. So do remember that this causes a quick take serious course. And the intention is that we tackled one specific topic, but one very important topic in less than 60 minutes so that you don't need to go through a multi our training and for this specific training. So this investor quick take training where we are discussing about cost of capital and understanding the capital structure as well. The core reading kids are going to give you is really understanding the capital sources, understanding why capital has a cost and also how to determine the cost of that capital. Because that's something that probably at a certain point in time, you will have to think about Ada as a value investor, as an investor. But also if maybe with your family, you want to invest into real estate or you want to rent real estate. What's the thought process that you need to have around allocating an amount of money to that transaction in terms of content and the agenda. So we're going to start with the exchange of money that is clear to everybody where we're coming from. We're gonna be discussing the return for asset class and we're going to discuss related to depth, to private equity, public equity, what are the expected returns that you can have? Why people invest into equity versus debt? Very important topic, as already said, this is what we call the ROIC, return on invested capital. That's typically for me as a board of director. That's what I have to look. That's the most important thing have to look into. If I need to, let's say, follow the interests of my shareholders. And then a practical example, Azure instead we're going to be working on for companies and then obviously a conclusion. So as I just said, so on the four companies that we're going to be discussing. So it's max of Apple, tech industry carrying Reshma, which is luxury industry. And we're going to determine actually the cost of capital for those companies. And also we're going to be using public equity benchmarks. So public equity we're speaking How about companies that are listed, those four companies are listed. We will not be doing this with private equity if you're interested in doing so, please go into the art of company violation training, why I'm explaining how to deal with private equity in detail and so on. The public equity benchmarks we're going to be using as we're done with Iran's mothers. As he is a professor at New York University's Stern School of Business. And he's always updating the cost of capital calculations. And we're going to also be using rating agency scores to determine or to use those benchmarks in order to determine the cost of capital for those four companies. As already stated, you will get from me invitations for if you have the time to participate in those regular webinars with Q&A sessions. So I hope that you will be able to participate to them and potentially also interact with me on those things. Because as I'm always saying, it's important that you practice as a value investor. As an investor, you need to practice his regularly. Wrapping up here and talk to you in the first lecture, which is around the exchange of money. Thank you for tuning in. 2. Exchange of money: All right, Welcome back to lecture number one on this investor quick take training about cost of capital and we're going to just set the scene and the contexts, but understanding the exchange of money. So what do we discussed about cost of capital? And there is one fundamental principle to understand is, why is there a cost to the use of capital? And let's put the following situation. What typically happens in the world, and this has been happening for centuries is that you have people that have money, that have capital, but they have not necessarily idea where to put this money into action. And you have borrowers. So people have ideas who bring ideas to the capital owners, but they didn't have the money for. So there's going to be in fact a transaction between the two. So let's take the example of that. On the borough aside, we have a person entrepreneur, he or she wants to produce and sell by orderings. But the person needs capital for this project and asking if that's if the borrower, if the intrapreneur can borrow money from you, in fact, you're gonna say, okay, I mean, you're gonna look, we're gonna do some kind of due diligence, are going to look at the business plan, evaluate also the person if the person looks serious was the track record. So you're going to say, okay guy, I mean, you look serious. You Biden's plan looks reasonable as well. So okay. But if I knew money, I want to have a premium on that because I'm going to be taking risk here. And how much are you willing to pay me back? So that's the question that the lender will ask to the person that wants to take a loan for running this new business and selling of bio drinks. And there is one important thing that we need immediately to put into the equation here, which is, it's not just about the lender taking a certain level of risk here, but also if the lender is intelligent enough and we're executing philanthropy here, the lambda will say, but wait, if you pay me back over a ten-year period, There's also inflation, so the cost of living is increasing. So the premium is not enough. So I need to add to the premium something in the US, we would look at the consumer price index, CPI thing because there is inflation and prices are increasing over time. So $1 today is not the same purchasing power or buying power that $1 in 10 years. So I need to add this as lambda into the equation. So the important concept that we need that I brought in here is that the value of money changes over time. And this is typically due to inflation and will not be discussing deflation, which is something that, for example, Japan has been exposed to, which is even worse. But I'm speaking about inflation when the value of the purchasing power of money declines over time. And there is a very interesting example here that are taken from Investopedia or whether we're showing the purchasing power for a cup of coffee. So around 50 years ago in order to buy a cup of coffee in the US. And I'm not discussing now the size of the cup of coffee. Consider that a cup of coffee is the same now than 50 years ago. In 1970, that was actually before I was born, you would have to pay 25 cents of a dollar to buy that cup of coffee. Today, you would be above one dot $5 per cup of coffee. But at the very end of the day, you're just buying a cup of coffee. So what is a problem? The problem is that inflation has been happening over the last 50 years. And if you do the calculation, in fact, I'm taking an average, linear average. I see that's the 159 dollar that is example is giving on 2019 purchasing power for a cup of coffee. Or the costs for buying a cup of coffee was $1.59. If you're bringing this back to 0, 25, 50 years before, it means that over 49 years, there was an average three dot-dot-dot 8% inflation every year in the US. So it means that the cost of living has been increasing in average by three dots, 8%. And actually now we are November 2021, there is a lot of conversation going on around inflation. And inflation is happening because money is cheap and people are spending a lot of things are also issues on the supply chains. So primary goods and materials, the cost is increasing as well. So there is inflation as well. So everybody is expected to have some kind of level of inflation in 2001, 2022, around five to 6% in developed economies and inflation. So that's something that naturally happens because typically the producers, they see, maybe they have issues with the production and materials so that cost of sales are increasing. So they need to pass this course too, the end buyers to the end-consumers. So typically what they do is they pass the cost to the end, to the end buyer, to the end consumer. And by that, inflation is generated. So that's one of the reasons why we are having this effect. And inflation is actually good and not too much. This is the role of, if, look in the US, it's role of the Federal Reserve or the European Central Bank, where the intention is they tried to have a little bit of inflation, but they try to be below or close to 2% of yearly inflation because they believe that's a good natural inflation to have. But too much inflation is not good. And, and I show you already the graphic about the CPI in the US there you see typically how inflation is happening on the amount. So those are official publications that the Bureau of Labor in the US is presenting. You typically see when obviously there are financial crisis, like in the 201820082010 period where indeed we saw deflation happening. And obviously during the pandemic as well, there was no inflation because everybody was stress. But now as the economy is picking up again and there are issues on supply chain, the prices of oil have been increasing hugely, so we have inflation today. So coming back to our scenario, you remember that the borrower, this entrepreneur, he or she wants to produce and sell bio dreams and is trying to raise some capital from lenders. But the lender said, Well, I'm happy to. I mean, as you look zeros, your business plan looks good. I like the product, but I mean, I, I'm taking some kind of risks. So what will you pay me back? And on top of that, I have inflation as well that I need to think about if you're paying me back over a ten-year period. So the borough will say, Listen, I mean, can we agree on 5% per year? So if you lend me 100 thousand US dollars, you will get in fact 150 thousand US dollars back after 10 years. So you're going to get every year 5% on the loan. So do the calculation. 5% on 100 k is five K per year. That's kind of an interest payment that the borrower will pay back to the lender. And then obviously at the very end of the 10-year periods, not only the Borough has been paying out five K per year, so that's ten years at 50 K, but also we'll be paying back the principal of 100 K US dollars. So at the very end of the day, the lender has been giving out a loan for 100 K and we'll get back 150 K over a ten-year period. And let's imagine that the lender is agreeing to this deal for 5% per year. It's obviously above the average inflation. If I take the three dot 8% and there is a risk premium of one dot t2. If you would look at the average inflation costs in the US. So and then they obviously go through a characterization process so that if something happens, maybe there is a third party who can rule. If in case it would be, let's say, an issue between both the borrower and the lender. So when you look at this one single example where you have an entrepreneur that is trying to raise capital for this bio drink project. And you have one, one-person borrow and 1 lambda that is providing a 5% interest rate per year. And this is what I call a direct model. So the risk is carried in fact by the lender. And imagine, I mean, this works today like this in the world that you would have Peer-to-Peer lending so that everybody would talk to everybody. And this is happening sometimes in private equity, for example, in venture capital in the startup space. Where in fact those startup, they do not go to the bank, but they tried to find direct investors and in the private equity space, it's the same. So you would end up actually, if you count the amount of transactions of contracts that are happening between lenders and borrowers. An n-squared formula which is huge. I mean, I'm just trying to show you here that there is an issue on scaling such a model. If you have ten lambdas and you have 10 boroughs and everybody is lending money to everybody. You end up with 100 contracts. And imagine you're doing this at the level of the population of the world. You would have like 10 billion people that are lending money to ten million, ten billion burrows up at a huge amount of contracts. So this model is not really scalable. And this is where actually banks come into play and that was what banks, it's part of the role of the bank. Please intermediate between lenders and borrowers, which actually brings down the amount of contracts that have to be, let's say record it by a third party and by doing that, so we are done in an indirect financial system where banks play this role of intermediate. You're going to end up in a to N instead of an n squared in it to an amount of contracts. So if you look on the right-hand side on the table, you see that for if 10 billion people who would lend out money to 10 billion borrows, you would only have 20 billion of contracts. And if you do this for 100 thousand people, you will only have 200 thousand contracts versus 10 billion in direct and square model. So you see that the banks obviously play an interesting role here. Just to hail the, let's say the needs for people who need to raise capital. And also it makes it much more industrialized because boroughs, and this is what I'm explaining in the next slide. They do not need directly to fund lambdas. As I said, with the exception maybe a venture capital, private equity, but they can directly go to the bank and say, I need to raise capital. Do we have money available? And this is actually what the bank are playing a role. They are not only the risk intermediate. And I'm going to show this to you in when they're going to be discussing in the next slide, the risk premium conversation between lenders and borrowers when you have a bank intermediate. But also they're going to play the role of a deposit protection, at least in Europe. For example, if it is Spain is Luxembourg, we do have every person that puts money on a savings account or creates an has a commercial account with the bank, has a protection typically in Europe is between €100,120 thousand per person. So it also gives a supplemental production to the lenders that if they put money into the bank, if the bank goes bankrupt, is going to be a third party, which is typically a government or state owned entity that will guarantee a minimum deposit protection. When we discussed about the risk intermediate, remember, in the situation we had before, we had the direct contract between the lender and the borrower with a 5% rate between the two. But as you saw from the n square model, it can be extremely complicated to have 100 thousand people that are trying to make contracts and to lend money to 100 thousand borrowers. And this is where the banks not only as a deposit protection intermediate, but also play a role as a risk intermediate. So they're, what they're gonna do is the following. Actually they gonna collect money from the lenders. But the lenders are not directly lambdas. They are people who have savings accounts, who have some sort of cash that they put in the bank to have some kind of protection or some kind of low return on that. And the bank with this mass of money that had been accumulating from the customers, they actually will receive the request from borrows. So they will take care of negotiating and understanding the risk that if a borrower, so this entrepreneur who wants to sell buyers rings, if this borrower comes to the bank and trust to raise money, they're going to take care of defining and determining the risk rates. Obviously, the borrower can go to a couple of banks and see if there are differences in the risk rate. So this is what I call here the b rates. So B being the burrow here and, and definitely this rate will be different, will be obviously higher because there is a risk for being an entrepreneur and will be higher versus what the bank is paying back. So that's the r a rate to the lenders because in fact, the lender does not even know that his or her money that he or she has deposited in the bank is being used for a bio drink project. So this really the role. And again, I'm not discussing if the banks are playing fair on this role of lending money to entrepreneurs. But that's basically the idea where banks as intermediate play the role, not just making, setting up a protection on the deposit, but also they play the role of the risk intermediate. So there's going to be this balance between the two. The bank has an intermediate will give a different rate, probably an hour for sure, a much higher rate because of risk premium and cause of inflation towards the borrower and towards the depositor, which we could see steel as the lender. But it's more the person that is bringing in cash on the savings account at the bank. The bank will probably give a much smaller rates to that person because there is nearly no risk. I mean, the money is being deposited on the bank. So why should the bank give a higher remuneration to this person? And the difference between the two, well, that's actually where the bank is making money. The difference between the RB and the pay rate. So imagine that if we come back to our example of 5%, that the RB rate would be five percent's between the bank and the borrower. So this entrepreneur that wants to sell those by orderings and the RA rate would be maybe 0% on the savings account. So you see that you have 5% on one side on the B rate and 0 dot-dot-dot percent on a savings account. The difference between the two, well, that cover, so that's 4 dot 8% that would cover in fact, the risk for the bank and obesity also, it covers the cost of operating this transaction between the two. Without wrapping up your lecture number one. And in the next one we're going to be discussing the return per asset class. Thank you. 3. Returns per asset class: Welcome back investors. In the second lecture, we will be discussing the returns per asset class. So going back to what we have been discussing in lecture number 1, which is understanding that when a borrower ask Linda for money, there is a cost associate to it. So the cost will be partially the risk premium. So there is a relationship between who the borough is, what the project is, versus what is the risk premium that the lender will ask to the borrower? And then as we saw through the Consumer Price Index, the real So cost of living. So if you're going for a 10 year loan, you will need to include the fact that the power of money over those 10 years, the purchasing power will change. That's what we call the cost of living, other causes of inflation. So I think that's pretty clear. But now when we discuss the risk premium, is how to determine that risk premium. I mean, we can, in a very arbitrary way say it's 5%, 10 percent, 15 percent, but there is always a balance between the borrower and the lender, or the borrower wants to pay as low as possible interest rates on the loan that he or she will be taken from the lender. The lender will try to maximize the interest rates. So there's going to be, we're going to use external information for trying to strike the right balance. So, but definitely if a lender takes a decision to set up alone with a, towards a bar, or there's going to be an expected return, otherwise lambda will not do it. There's going to be a certain level of appetite for risk. So that depends how much. If the lender is willing potentially to lose the whole money, liquidity as well, how fast the lambda can get out of the load if he would be needed, can be Lambda Aris other loan to somebody else. Obviously you can imagine in a private transaction that's very complicated to have. And then also the lambda and I'm discussing this extensively in other trainings as obviously to understand the competence that he or she has as a lender. And I was speaking about a specific industry that the lender wants to invest into and has knowledge and experience about it seemed for the geography, but also the asset class. So I was speaking about debt instruments, public equity instruments or private equity instruments including venture capital for example, if I just take those big categories of asset classes. So one of the things that I always like to put into the perspective is the balance between the expected return versus the risk of the investor or lambda. But here we can't speak about an investor because lambda is a type of investor is taking. And typically when we take those attributes, I was just mentioning in the previous slide. So the risk appetite, the expected return, the liquidity and the competence of the investor slash lander. We need to take into account also that we do have various asset classes as options available to us. We can start with short-term treasury knows long-term treasury notes. We can go into a sovereign bonds or investment-grade corporate bonds, can go into large cap, public stocks, small cap, and then again go into junk bonds. So those are bones that are very, very risky. And then typically in this function between expected return and risk, we're going to see private equity, venture capital and business angels. In fact, on the very top of the curve, Some of you know that I'm a value investor solely be typically investing into large cap public stocks that have different attributes that are solid. So when we look specifically at now treasury notes. And so i'm, I'm extending this also to governmental bonds. And I'm taking here the example and took the liberty to take a screenshot from Bloomberg where we see, for example, that you may have and you have treasury bonds available for three months that you put your money for three months and today, so we are in November 2021, you're going to get 0, 0, 4 percent return. If you put that money into a three month treasury bonds of the US government. If you're going up for a 30 year, bonds of the US government's. Well, there actually you see in the red frame on the left-hand side that the US government is today guaranteeing a 2% return if you take such an instrument. So obviously you will get the main or the principal. You will get that back after 30 years. If you invest 100 thousand US dollars today, you're going to get those 100 thousand US dollars back and you will get every year 2 percent on it. And US is not the only one who is, let's say printing are making such instruments available. You obviously have the same for Europe and you can see on the right-hand side that Germany, for example, on the ten year government bonds, has still a negative yield of 0 dot-dot-dot 18. And because of inflation, we start now to see slowly after the crisis, the COVID crisis. We're starting to see the governmental bonds going back into positive territory. The same for Asia Pacific way is if, for example, you see, for example, New Zealand with 2.5th 8 or India with six dot-dot-dot 36 percent. So that's more for as a treasury notes and extending the Treasury notes to governmental bonds. But we also have, if you know how bonds work, you also have the possibility that corporations are raising money through corporate bonds, so through corporate obligations and they're typically. We have two main categories of bonds that we discussed. Those are the investment grade bonds and the non-investment or junk grade bonds. And for that, basically we are and I'm introducing you to the concept of rating agency. So those are the most known in the world, but you have a Japanese rating agency. You have many rating agencies, but the most known rating agencies, Standard and Poor's Global Ratings, Moody's and Fitch Ratings. And basically when you look at their rating taxonomy, they do score corporate bonds, but also sovereign bonds. So governmental bonds between a rating of, typically we speak about AAA rating, that's the best one. It's investment-grade, top-level. Then it goes down to double a, A1A and triple B as a p and Fitch Ratings, you see that Moody's has a triple a, A2A2 and BA two rating. So the white part of that table actually is considered to be investment grade bonds. If you come back to our graph. So that's the first red frame on the left. But when we go into non-investment grade, non-investment grade bonds, well, we do have those as well. And those three major rating agencies, they do also rate the solvency. So how strong the companies to pay back its debt commitments over the, over the term of the depth commitment. And we do have companies that have and receive a WB be true, proceed double C or even a C, there is a default. And you see that for Moody's and Fitch, they have their own rankings as well. So for example, fidgets WEB similar to as API and trip, trip OC is still there, but then when it goes, it goes closer to default or in default, it's considered a double d, for example, for Fitch Ratings. But the principles are the same, is we will be able to find out if you want as an investor to put your money into an bond or a corporate bond or a sovereign bonds. You're going to have those agencies that will very, very probably have an opinion and publicly mentioned what is a credit rating of the instrument that you want to put your money into. This. And so this is important to understand. Now bringing this back to how does this apply to cost of capital. So this applies to cost of capital in the sense that, again, coming back to the very basic scenario, we had, the scenario between a lander onto borrower. We are trying to understand what determines the risk premium outside of causes of inflation. I mean, that's very clear. We're going to follow cause of inflation on that we have central banks or provide those fingers and statistical institutes. But here it really depends on the bank, sorry, not on the bank, on the company. How rated, how well rated or valley rated the company is on its solvency. And basically, we do have, and I've put here what I'm going to run with, as already said, one of the gurus about valuation is actually publishing. And he considers that depending on how, let's say how strong the solvency is of the Internet that you want to put your money into. You may need to add or not a risk spreads. And this risk spread here specifically without going too much into the technicalities as quick take course. But doesn't want Iran, Iran considered actually that you will be looking at what we call the interest coverage ratio. So the interest coverage ratio is we're looking at the earnings before interest and taxes and dividing it by the interest expense. And you, I mean, if, if you're interested, you can see examples that I have been giving on ever ground day, the Chinese real estate, I think it's the second largest one where the interest coverage rate is 1 dot five. So with 15, the earnings are just enough to cover the interest expense. That's what the R15 means. Obviously, when you have the interest coverage ratio that is below one, it means that you are paying more interest, that you're earning money. This is not sustainable over time. And this is where probably you're going to have the rating agency that consider that if the earnings go down, the company is going bankrupt. So that's why you're going to see interest coverage ratio that are very, very low for probably junk bonds are companies that have issues to pay back, that adapt. Companies are very solid. That's my investment style investing in blue chips where the debt to equity ratio is pretty low, where the interest coverage ratio is very high. So they're definitely, you're going to be in the universe of triple a, double a, single a, so investment grade bonds. And so you need to understand that at anytime you need to add the riskiness of the investment and the riskiness of the depth that the company is carrying as a measure to define your risk premium as well. And you have some investors that are very, very successful in investing into junk bonds because nobody wants to invest into junk bonds. But you do have some people that are very successful on that. The next category, so we discussed investment grade bonds and non-investment grade bonds are junk bonds is typically large cap and small cap stocks. As I said, I'm a large cap public stock value investor. And there in fact, again, we need to understand if I'm the lender and I want to give my money to accompany there is, for example, listed on the New York Stock Exchange. I need to understand what is written there, but money is giving back to me. And for companies, you need to understand the company's have two ways of raising capital. They have one source of capital, which is printing depth. So this is what companies do it through corporate obligations. This is what governments do through sovereign bonds. But a company can also raise capital through equity. So asking either existing shareholders to increase there, how much capital they bring in. So this would be capital increase all they asked actually new investors to come into the company. And this works also for the private equity and venture capital of space. So the return actually will vary depending if the balance between debt and equity. And it's true that again, today we are November 2021. The cost of debt is extremely low. I mean, we have interest rates that are close to 0 for the time being, you saw it on a three month, six month US treasury yield, what you get, you get 0000, 4% on a three month. That's nothing. 20 years ago, 30 years ago you were having like maybe something like maybe two or 3% on a three month treasury yield of the US government. So independent of that, so what I mean is we are again thinking about the cost of capital. So determining the risk premium, I said to you earlier, we know how to determine the cause of inflation. We just need to look at consumer price indexes and add this when we give our money and we put our money into an investment vehicle, into an asset class. But now here's specifically what about when we invest into public or private equity companies? And here we're going to be discussing about public equity company. So basically as we're done with Iran, which I already introduced as being the professor. He's a professor of corporate finance and valuation at New York University's Stern School of Business. And he's really considered the Dean of valuation. And what he actually stays and I kind of agree to that is that basically you're going to have in terms of if you want to determine your cost of capital, you're going to determine the industry average. You're going to add on top of that, how, how the company is perceived by rating agencies from a solvency perspective, that will be the company rating spreads. So coming back to the AAA, AAA, etc, those, those ratings, we saw junk bond ratings and also then a country-specific risks. This is more macroeconomic of the country-specific risks. This is probably linked or very, I mean, it's not probably it is linked to the fact that some countries are considered to be more stable than other ones. So this is geopolitical aspect that comes into the play of cost of capital. And with all due respect, I do have African friends. But in some countries in Africa, you may have a political turnover. There is definitely much Island, for example, in Europe or in the US, that, that thing brings in a specific risk if you would have to decide to put your money into an African public equity company, for example, it would be listed, I don't know, on the Johannesburg Stock Exchange. So the formula here for equity is important to understand. Two are going to take industry average compri, company rating spreads. So the company risk in this aspect of valuation and then also the country specific risk for those geo-political matters that I just mentioned. And I put the URL so that you cannot get it by yourself, so I'll put them on. Iran is doing this exercise at least once per year. So I've taken here the table of January 2021. So this is latest one that he has been publishing. And we see in fact that the total markets, if we would take just an average assumption that the total market without the banks, because the banks have a different way to look at cost of capital. And also how we evaluate a bang is just different. We look more at things like price to book than, than earnings per share and those kind of things. But basically consider that if we would take all industries and all companies, you see that he has been analyzing 41,623 companies. That without the banks, We currently have an average industry cost of capital of 584 percent in January 2 thousand 21. This is how and you can look up how it is calculated. It takes into account the cost of equity, the cost of depth. So he's taken into account also an average tax rate that he sees for that specific industry. So there will be read an average of averages. And then remember the formula. We not only have the industry average, we need to add the spread linked to how, how risky the depth that the company is carrying is analyzed or is evaluated. So again, if we have an interest coverage ratio, so there is nearly no risk of default of the company and the company is carrying out, the government is carrying a triple a. The spread will be very, very. Low because it just the probability of this company going bankrupt and not being able to pay back depths and even paying back shareholder loss is very low. And you see here in the red frame on the left-hand side, for large-cap companies that are non-financial because the banks, you have specific valuation method for the banks. But otherwise, if you look at the interest coverage ratio, which is kind of linked to the rating, you can see what the spread is that done with around integrals into this. And when you have smaller calves are riskier firms. So that are not necessarily public equity. You're going to see that it's not the spread that is changing, but it's the interest coverage ratio that is changing. For example, for the Triple A's, interest coverage ratio has to be or can go as low as 85 on large caps. While on the right-hand side for smaller firms, done with Iran considers that 12 dot five is the maximum lower value in terms of interest coverage ratio for those smaller firms to keep the same spread of 0 dot 69 percent. And then we'll come back to the country defaults to remember we have industry cost or the industry average cost of capital. We need to add to that the riskiness or how solvency looks like for that company. And the interest coverage ratio is a measure on how to estimate what is the risk of the company if the earnings go down, that the company will go bankrupt. And remember that below, below three, it gets really complicated because the cost of just paying back the depth by interests is just too high versus the overall earnings that the company is doing. And then the third element that we saw in the equation is a country default. So bringing back geopolitical aspects now, if I take my country, Luxembourg, Luxembourg has a triple a rating from Moody's. And basically, there is no risk premium in Luxembourg is considered a very stable, politically very stable country will not have riots, will not have huge changes in the political decision-makers. If you look at other countries like, let's take for example, Cyprus. Cyprus is considered more risky. Probably there are some things that are related to Turkey and Greece, and I don't want to go into the political aspects here. I'll leave that to everybody. But moon is this considering Cyprus NZB, a2 rating, and that's the country risk premium is 91%. Look at Portugal or even Spain as I'm half Spanish as well as Spain has from Moody's BAA one rating. And so it's not so risky as Cypress, but it's a little bit more risky than Luxembourg. So there the risk premium for Spain would be one dot 55 percent that you need to add. If you are investing into Spanish company, you need to add that control risk premium to the rating of the company itself, how, how good or bad the depth is, and then also to the interests of the company is in. This is basically what we will be doing. At the end of this course. We're going to be practicing this on a Microsoft, on Apple, on Reshma, and on carrying so to tech brands and to luxury brands, with one being in Switzerland, one in France, and to being in the US from Microsoft and Apple where the headquarters are sitting. So again, just refreshing everybody's mind here. So the cost of capital, when we are in, in thinking about investing into public equity, we're going to take the industry average that is compounding every year, at least for us. And then we're going to take the company rating spread and use the ratings of the rating agencies, how they analyze the depth of companies. And then we're going to add to that also country specific risk. And then last but not least, when we go outside of public equity, because you will not find solvency rating or depth rating for a private equity or even for the startup of your neighbor. So this will not happen. So there, what I typically use is there is a very interesting report that is published every year. It's the Pepperdine Gaziano business school report where they look into private capital markets and they try to surveys to understand what are the methods that business appraisals are using. Or investors when they invest into private equity. So those are companies that are not listed on the stock exchanges, but also venture capitalists or more in the world of startups. And what we see if I just extract one, I've put the Yarra Valley and the source so you can look it up by yourself. There are many interesting things in that report. So you see that typically venture capitalists, and depending on the stage, investment stage of the company, if it is a very initial seeds. If it is already a series a series B funding, if we're in a mezzanine funding rounds, you're going to see actually that the riskiness is going down because we all know that startups, nine out of ten startups, they do not survive more than five years. And that's, that's the case for all developed markets. So if you invest into startup today, you have 90 percent chances that you're going to lose your money. That's why the premium in terms of risk will be extremely high. You see? Variations of the risk premium up to above 30 percent. Sometimes it's actually even more. And when you, when you go down in risks, so the company has done initial seed, has done series a, series B funding, and actually is nearly ready to IPO. So to do an initial public offering and to become, and to move from private to public equity and maybe a mezzanine funds. So you're going to see the risk premium going down, but it will still be high compared to what we were. And I will show this to you through public equity examples of Microsoft, Apple carrying, and Reshma. Where for example, me as an investor, I'm happy if I receive between 6, 7% every year of return because I know those companies were not go bankrupt. And that's good enough for me. I'm not a venture capital investor, for example, non angel investor because for me the probabilities to HIV losing my money and I don't have an appetite of having the willingness to lose my money on that. And without going to the details and the different valuation methodologies, obviously when you're in the venture capital space, you, the company is not writing profits, the company is losing money. Then we're going to use probably more multiple of revenues valuation methodologies. Why in private equity, the company is probably already printing out a money and earning positive outcome, having a positive result of the operations. And they're probably going to use earnings before interest, taxes, depreciation, and amortization, or maybe the net operating profit after taxes depends on the style of the investor. But taking into account that the higher the risk, obviously the higher the risk premium will be. I think that's if I have to summarize and coming back to this, this diagram where you see the balance between expected return and the risk. I mean, there is no secret source. The, the, the higher your return expectations are for the money that you will be giving to somebody. If it is a startup with bio drinks, if it is a private equity company, if it is a public equity company, of it as a government. And also depending on the period of time that you're given all this money, the there will be written associate to it and buy that also a risk associated to it. So, and then Americans about it. And this is the way how I think when I put my money somewhere, that I tried to determine what is the right cost of capital. And again, I'm a value investor. I'm investing in a very large companies in the US, in Europe, maybe in the future in Japan and China and not for the time being, it's not part of my competence universe. And with that, I'm fine if I get 67 percent every year and that is definitely lower than the inflation. So my risk premium would be at the current level of inflation, will be nonetheless a couple of points of percentage versus the cost of living that would increase. Obviously, if inflation goes to 10%, I cannot live with a 67 percent return. I need then to add to those 10 percent, I need to add a premium to that. So without wrapping up here, it was, this was a little bit longer lecture writing was important that you understand how to estimate the cost of capital and this balance between return and risk. And in the next one that will be shorter lectures why actually people invest into equity investments versus depth instruments. So stay with me and talk to you in the next lecture. Thank you. 4. Why equity investments vs debt instruments ?: Welcome back investors, next lecture. This is a pretty short one, but I felt it was important to have because it's a question I often get is why people actually invest into shares instead of just putting their money into bonds, corporate bonds or governmental bonds. And first of all, just teen, I just want to share with you some public statistics about what is the amount of depth, what is the size of the debt markets worldwide versus equity global markets? And if a look, for example, the New York Stock Exchange or the US markets and all other smaller exchange places. If I take Japan, Xiang Gei, Euronext, et cetera, I mean, today more or less we're speaking about 90, so 900 trillion of dollars. What the equity global markets. We are speaking, public equity mostly. When you look at depth, the depth global market is considered to be in fact four times that amount. So to be more or less around 370 trillion US dollar or so. We already see that there is much more depth. And obviously the COVID crisis did not tell because governments that are printing money and also raising money through governmental bonds. They are indeed also, they have pushed also the amount of public depths and the size of the global depth market also to new highs. What you can see from the middle graph here. So the question I often get is why investing into asked you why you can the r value investor and you just buy shares. And truly, I'm not investing into corporate bonds, I'm not investing into governmental bonds. And people invest into equity. And you remember from the risk to written expectations, well, first of all, when you invest into shares, you're going to probably have higher return than investing into bonds. I'm not, I'm leaving now the junk bond conversation aside because there, you may have bonds. I saw, for example, in the COVID crisis, some companies like, I think it was fought that was printing out a new corporate bond at 5%, which is more than my written that I'm expecting on large-cap stocks. And but that's not the only affect people indeed by equity. Because first of all, and leaving the junk bond conversation aside, they will get a higher return than investing into corporate bonds of highly graded companies and also governmental bonds. That's one thing. The risk is little bit higher, I remember that. But what is interesting, and this is what I'm doing as a value investor is I tried to buy a very cheap companies when they are at least 30 percent before below the real value. And again, it's not the purpose of this course to do that, I have other courses at speak about this. But the intention is really that you buy companies and that you have a double leverage. So first of all, and this is my investments that when I put money into large-cap companies. And if those are called Kellogg's, nestle, BASF, dimer CDs, Microsoft is that I want to have a specific return me while my money sit still and y will be my money sitting still because it will take some time until a certain man in town, the markets really reflects in the share price of that company, reflects what the company is really worth. And this is how I'm making money. In fact, I'm trying to buy 30 percent below intrinsic value of the company. And while my money sit still, that I can get a six to seven or even say five to 7% return through a return to shareholders can be cached, dividends can be scrip, dividends are printing out new shares can be share buybacks, those kind of things. And there are certainly, and it always works since more than 20 years I'm doing There's always worked out that I had to be patient, but I certainly in time, it comes back and then indeed I'm able to cash in because then our certainly in time giving you an example, I bought Dymola at 51. Domino is now very close to 90, and this is in a three-year period. And during those three years I've been receiving dividends that were above my expectation, so I cannot complain about that. So that's a value investor. And just listening to what Warren Buffett, Charlie Munger are doing. They're not the only ones petrol engines doing this template and is doing this as well. So those are techniques that are being used, but you need to have, you need to be patient on this. But this is a reason why people invest into equity because first of all, they get a higher return versus adapt instruments, even though the risk is little bit higher. But if you do it right, and the company is being undervalued and underpriced by the market, you're going to see the share price at a certain meantime go up. And by that you will not only have received the higher return, but also at the same time, you will be able to have an accelerator versus just getting the principal back at the end of a corporate bond, for example, after ten years when you get the principle of imagined, you gave in 100 thousand US dollars for a bond. The company is giving you coupon of 5% every year and after ten years you get the 100 K back. But the really, the idea is in terms of appreciation of share price, that's really where you can exponentially grow your wealth. In fact, hope you understand that points and remember one thing also, why the risk is higher and bring this back also to the balance sheet. When you look how a balance sheet is structured, and let's leave the the assets on the left-hand side of the balance sheet is up on the right-hand side. There is an order of priority. If you are a US gap company that follows US GAAP accounting standards in Europe would be the other way around for IFRS. But in any case, credit Hola, if there would be liquidation of the company, they will always be paid back first before equity. Whole loss, which means shareholder's equity holders are shareholders. So remember that. So just by looking at the balance sheet, you understand that the risk is higher, the risk carried by equity holders is higher versus credit totals because in terms of liquidation, well, you're going to have the credit whole loss first being receiving the money that comes out of a liquidation of the company. So selling those assets, converting the assets on the left-hand side into cash. And if there is no cash left after having paid, paid back all the depth of the company or the shareholders, they end up with 0. So we see also through the balance sheet structure that the risk is carried more by the shareholders, equity holders versus the creditors. So that's an important aspect that you need to take into account. So we're wrapping up here in the next one, we're going to discuss about how companies in fact create value. And we're going to discuss return on invested capital as we have now understood in not just this lecture or the previous lecture, how to calculate the cost of capital and then being able to determine, okay, but how is the company generating value for its shareholders? And we're going to discuss in the next lecture. Thank you. 5. Return On Invested Capital: Welcome back investors. In this next lecture, we're going to be discussing return on invested capital and how companies actually create value to their shareholders. So again, to set the scene first, the purpose of commercial companies, but also the purpose of you as an individual investor when you put your money into certain type of investment. If there's a startup, it was private equity, public equity of bonds, maybe giving your money to your friends, you expecting, I hope that you're expecting some kind of return on it. So you want to have that money generates some kind of profit. And the mixed schooling philanthropy here. And profits cannot be generated from thin air. So for that you need, and this is basically for companies. They will, and they hope they have assets and they hope that those assets are generating a profit. So assets actually they carry intrinsic value. And we're going to discuss the circulatory system of money where capitalists brought in by capital, bring us, which can be equity or shareholders, but also credit hollows like a bank for example, and the company takes a loan at the bank. So those assets that are controlled by the company, the expectations that those assets generate future streams of revenue and profit. There's benefits can be an inflow of money or fresh cash due to margins. Profits can also be a reduction of costs because maybe the assets that are being used and the money that has been used for the company operations will improve the operations of the company and make the company much more efficient. And by that, reducing the amount of, let's imagine external cost of sales that the company would have. Also the, remember that assets change over time. So the value of assets changes over time. If you're buying a car today, the car is worth acts. In 10 years time, the car is worth much less. And this is not only used or not only linked to the use of the car, but also to the cost of living. So you have both elements. So how much use the car? This will depreciate value of the car over time, but also the cost of living, as we discussed, a cosmic inflation will also change the value of an asset. And something you have to another cause for me, you know, the circulatory system and I like always to bring it back. And I'm going to bring now these back and look specifically at the cost of capital element of the circulatory system of money. So first of all, and I'm bringing in the balance sheet so we haven't the right-hand side, the liabilities side of the balance sheet, on the left-hand side, the asset part of the balance sheet and the milli have senior management. So basically what happens when a company is created is the company is created by shareholders and their shareholders, they bring in very often cash, sometimes they bring also tangible assets. But let's consider that for the sake of training, that they just bring in cash. But also the company can raise money through alone, can be a corporate loan, can also be a bank loan, for example. So the company may have a certain amount of money that comes in through equity shareholders but also through creditors. Adapt told us the expectation that action of bringing in cash into a newly created company or company that already exists and is doing a new round of capital increase. Is that that amounts or that transaction of bringing in fresh capital A1 through credits depth or through shareholders is creating some expectations on cost of capital. Again, excreting philanthropy here, but this, there are some expectations, they're intrinsically part of that transaction. So the Board of Directors and senior management of the company, they need to know what are the expectations of my shareholders and credit holders. Because I need very probably at least to generate an amount of profits from my operations that covers that cost of capital. So basically the cash comes in. Then Board of Directors and senior management decides to allocate that capital and to transform that cash into some kind of assets. Can be a manufacturing plant, can be building, can be people, processes, products, research and development with the hope that the company will generate a profit from those assets. And then comes the crucial moment. Let's assume that the company is indeed generating a profit. The company has to think what I do now with this profit. Imagine we are the end of the fiscal year and the company has generated a profit. The company has in fact three options and it can be combination of those three options. The first option is my shareholders expecting the company to grow even further in terms of market share and new customers, geographical expansion, new products are going to use that cash and reinvest it into my operations to expand my, my market. And or The company carries some depths, are going to pay back my credit holders because, I mean, in any case I have an obligation to pay them back. But maybe I'm going to anticipate giving them the money even earlier and not waiting ten years to pay off the debt that I have with them. This happens sometimes that you haven't anticipated payback of credit told loss in corporate companies. And or third option, I want to give a written back to my shareholders. They, I mean, we have 80% of the markets. The shallows do not want to expand to other geographies. They are fine with the current level of profits that we are doing. So they expecting some return coming back that way. And because they don't want to expand that, invest further money into the operations. So I need to think about cash dividends, scrip dividends, maybe share buybacks as well. So that's a way of what we call the Free Cash Flow to Equity. That's a way of giving back cash and not only casual written at least two shareholders. So, and remember it can be combination of those three, they're not exclusive. And if it is me running my own investment fund, but also when I'm sitting at the board of directors where I'm in, I need to think also on behalf of my shareholder or shareholders. What is the expected or what the expectation in terms of cost of capital? And is our management is in a management in fact, and matching those cost of capital expectation. And this is where I'm bringing the measure of return on invested capital. And I prefer to look at return on invested capital versus return on equity, because unwritten and equity, I only calculate the profits of the company divided by the equity. But if a company carries a huge amount of depth, It's going to give me a wrong perception of the profitability or the ability of a company to generate profit. So I prefer to look at return on invested capital because I'm going to use debt and equity as a capital source. And I'm going to take the income of the profits of the company and divide it by both elements of capital. Which then gives me a much more realistic view on how profitable the company is or the ability of a company to generate profits. So and kind of summarizing it, when, when I look at when I spent my money on something, it intrinsically carries a cost of capital. And what I need to think, and you remember we started with inflation is that first of all, obviously the cost of capital has at least, or the reason that I going to have has at least to cover the cost of inflation. Otherwise I'm destroying value. This feels obvious, but not everybody thinks about that. So the first thing is that my return on invested capital, if it is me investing into my own fund or when I'm sitting as board of directors and I know what my what the ROIC expectations are for my shareholders. I need to make sure that first of all, they cover the cost of inflation because of living. Then they need very probably depending on the type of instrument I'm investing into, they need to cover also the risk-free rate. I do use a 30 year US treasury bonds as a measure of risk-free rate. I do not believe that the US government will go bankrupt in the next three years. So that's the second measure. So my ROIC needs to be above inflation and has to be above risk-free rate. And then we have this cost of capital that we have been discussing and we're gonna practices in the next lecture, where indeed we're going to see how to calculate the cost of capital based on the type of company, the industry geography the company is in, and how also the solvency of the company is. So all that put together, it means that my ROIC has to be higher than my cost of capital. And I'm going to bring in in the next slide the definition of weighted average cost of capital. That WACC has to be higher than the risk-free rate, either use a T3 US treasury bond and that's risk-free rate. Well, obviously will be higher than the average inflation over the next 30 years at the moment, you would buy now that treasury bond, which is for the time being 2%. And I mentioned the WACC, the weighted average cost of capital. Y now bring in something on top of cost of capital and trying to waiting it to an average. Well, basically, when you can accompany you were discussing the balance sheet of the company. The balance sheet is the stock of wealth since inception, since the company has been created of a company. So you have the liability side where you have the credit totals and the shareholders, shareholders are considered a liability to the company, then you have the assets. When I look at the liability side, I need to bring in the definition of capital structure. So the capital structure is termed that defines the type of financing the company decides to rely on. And not all companies. I do not, for example, I like to use depth. I like to use pure capital to shareholders. But today, for example, and that's one of the problems. Why we are having inflation is that money is so cheap when you raise depths that you nearly get it for free. So you just need to pay back the principal you have seen. Sovereign bonds, government bonds that were close to 0% even negative. So it's really something that you need to bring into the equation here is that the cost of capital of a company, the cost of capital of you as an individual investor, in fact, is not a cost of capital, the weighted average cost of capital. And that WACC depends on capital structure and it depends on how much depth you're going to raise in terms of percentage versus the total capital structure. And let me give you a concrete example. Let's imagine we are a public equity company. And so it is a public equity company. And we want to estimate what is the WACC of that company. And the company has the following capital structure. The company has 63 percent of the capital that is brought in through liabilities and 37 percent of the capital structure that comes from shareholders. So you see it's nearly a 1 third equity, two-thirds depth. So we need to bring in this into the equation of the cost of capital. So we're going to state that and it's just an assumption that the cost of equity is 12 percent. And we're going to practice in the next lecture how to calculate this precisely. And as the capital structure says, it's 37 percent. I'm going to multiply this 10% by 037, and then I'm going to take the remaining 63 percent. And let's assume if we would take a loan that the bank would tell us at the county the cost of depths. Imagine a 10 million loan for the next 10 years would be 4%. And then I do the calculation and it gives me my weighted average cost of capital, that would be 6 dot 96 percent. So basically it means that I hope that this company would have in order to grow, outgrow the cost of capital and to grow the wealth of the shareholders, it has to generate a return on invested capital that is above six, 96 percent or above, let's say 7%. And that's 7% will probably be higher than the T3 risk-free rate and that will be higher as inflation. And this is how we calculate the average cost of capital. And as already stated earlier, we have odometer on who is in fact calculating this for us. And looking at thousands of firms and in the latest publication related to return on invested capital was at the average return on capital for those various industries. Is. And you remember that our average cost of capital being fathered 84 percent. You see what the average return and capitalists you see, for example, advertising computers have, have, have a very high ROIC. And that ROIC, if it is higher than the average cost of capital, well, those companies are outgrowing and they are really building up a lot of wealth for their shareholders. But you see, for example, that oil and gas, they have a negative ROIC in average on 278 companies that have been analyzed by asthma, I don't want to run. And they have a negative minus 6 or 33 percent, which means that probably they carry a cost of capital that is positive. But if you are investing or if you have been lit, investing into oil and gas companies, they have been probably destroying wealth because it looks like the average ROIC in fact is negative. And exactly what we're going to practice now on for concrete companies are gonna take maximum Apple, very big. So those are mega capital market capitalizations. Us companies, tech companies, and we're going to use to luxury brands carrying and Reshma, that also public equity one in carrying his French and Reshma, Swiss, swiss. And we're going to calculate our cost of capital and look at their ROIC. That's what we're gonna do in the next lecture. Thank you. 6. Practical examples & conclusion: Welcome back investors. This is the final lecture before the conclusion, as already stated in the previous lectures, we're going to now practice our eye and really look at read accompanies. I'm focusing on public equity companies. We're going to calculate the cost of capital for Microsoft, Apple, us, mega cap tech companies. And we're going to look at to luxury brands of France and Switzerland which are carrying enrichment, which also public, perfectly It's accompanies and those also a large-cap companies. So just again, refreshing our minds here is we will now determine this cost of capital and we're going to use public equity benchmarks. We're going to look at typically as we're done with around, and also look at rating agencies scores for those companies because I guarantee you for public equity companies, as already stated earlier, you're going to have the big rating agency that they're going to provide a public, public information on how the solvency looks like for those companies. And this we're gonna do and remember the formula to estimate our cost of capital. So the expected return, we're going to take the industry average, we're going to take the company rating spread and I'm going to take the counter specific risk. So again, using Woodmont around sources of information, and I been tried to be as precise as possible here, I've put apple as an electronics consumer, an office company, which has, for the US cost of capital of nine dots 82 percent according to what I'm going to run, Microsoft is more in the software system and applications industry. They didn't have a Clouds category, or at least there is no cout industry buddy I considered to be a software company. And that carries in the US a cost of capital of 974. Our luxury brands. So carrying French company Reshma, Swiss company. There is no luxury category industry in arounds table. So I just took retail because I can tell it's a special line, retail. And so that has a cost of capital of 567%. So that's the first thing we have the industry average for those four companies. Now, we need to add our specific credit risk rating spread. So when we look at and remember the formulas, we were looking at the interest coverage ratio. And I'm really walking you through here, taken from Morningstar.com and from Moody's. And we're going to start with Apple. Apple has currently, according to Morningstar, a 42 times interest coverage rate. So it means that the earnings can pay off 42 times the amount of interest payments that the company has, which is huge. And Moody's is stating that Apple has a AAA rating, which is one of the highest ratings that companies can have. There is just a AAA above that. So when we take those two examples and we'll look at odds with the Moran's table. We see that the spread that we need to take into account for that A1 rating with a 42 times interest coverage ratio is 0 dot-dot-dot 69 percent. So the risk of the spread that we need to take into account because of the risk is pretty low. So it's really very minimal in terms of premium that we need to add to our cost of industry that we saw in the previous slide. Some exercise for Microsoft. Microsoft has a AAA rating, so a little bit better ratings than Apple. And interest coverage ratio is nearly 34 times. So again, we're above our eight dot-dot-dot because it's a large-cap company. So we just need to add a spread of zeros, 69 percent carrying. So this is a French luxury brands, has an interest coverage ratio of $30.46 are very healthy. And in terms of rating, I didn't find it directly on the Moody sites. No Fichte know Standard and Poor's, but I looked in their annual report and I saw that they were mentioning that carrying has a minus rating. So even with an interest coverage of 30, we can actually say here with an a minus rating that I would consider it to be a 133 percent spread that we need to add a non-zero 69 percent even though the interest coverage ratio is very high. But I believe that we need to consider that the rating is an a minus here. And I'm going to do the same for Reshma. Reshma, you see in terms of interest coverage rate is only eight times. But on the, I think this is the moody sad if I'm not mistaken, the rating is an A1 rating. So I would consider that here the spread that we need to add is one dot 07, even though indeed interest coverage ratio is much lower than the other companies. But again, eight times is absolutely enough. Even if the revenues would go down, the earnings will go down by 20, 30%. There is still enough margin of safety to pay back the depth and interests linked to the depth. So bringing this together, we, before we do that, we need to look at the country risk as well. So carrying is a French company, and France has an a2 Moody's rating. And so we need to add a country risk premium of 0 dot 48 percent. For Switzerland. Switzerland as a triple a rating like Luxembourg. So there, there is no risk on the country. So for each small which is headquartered in Switzerland's, they will carry a 0% country risk premium. United States has also AAA, AAA rating from those from Moody's amongst others. And so because of that, we're going to consider that the country risk premium is also 0%, 1 of the things I wanted to share with you as well before we move into comparing the return on invested capital versus the weighted average cost of capital is, you can also see for those four companies, when they have been raising fresh money through dept, not true, not true. Equity holders are shareholders but readapt, you actually see the nodes if they are unsecured or secure. That's not now the conversation here, but you see that, for example, Apple was able to raise money between 1% short-term notes up to three dot 6% on 30000, 42, which is way, way, way out into the future. Not sure if Apple will still be around. Mark Tuft has been raising money through adapt at a cost between 2006 and three dot one, you see it on the left-hand side, bottom side of the slide. Carrying also has been raising money. And you see between 0, 5% and the Reshma, they also have coupon between seven and 16 percent. So remember our curve between expected returns and risk. We again see here just by the percentage of return that the company is getting back to debtholders. Speaking about investment grade companies, if you wouldn't be looking at junk bonds, you would see coupons at 8%, 10 percent ever Grundy has been raising money at 12 percent. So here we are really in the universe of investment grade bonds in fact. So then the last thing that we need to remember or formula that the expectations from us as investors into those public equity companies or others, shareholders of these companies want to have a return on invested capital that is above the weighted average cost of capital that is above the risk-free rate, that is above inflation. Let's first look at the return on invested capital. So Apple, according to Morningstar, has an ROIC of above 50 percent, which is huge. Microsoft 33 percent ROIC carrying 16% of RIC and Reshma forward Eighty-five percent of our IC. Now we have all the elements that I'm bringing this now together and summarizing this is we know the cost of capital for the industry. We did this in the beginning of this lecture. So we have our app and 982 mikes of 1970 carrying 567 enrichment 567, taking the assumption that we agree that it's a specific retail category, we have the debt rating, so the decorating with interest coverage ratio gives me a rating spread. Happy monks of what's 069% for carrying 133 and flourish more one dot 07, then we have a counter specific risk. The only country that does not carry a 0% country risk premium is France, where we add 0 dot-dot-dot 48%. Now if you look at the column R, which sums up a, B, and C, it sums up the cost of capital for industry on an average. It sums up, it adds to that the rating spreads. And it adds to that the risk that is related to the country. We're going to end up in our cost of capital, our expected return. And we see that for Apple, the expected return is 1051%. Microsoft is 10 or 39 percent, carrying is 7.48% and Reshma will be six dots, 74%. And now we have our cost of capital. If we, so it's our weighted average cost of capital. Remember that as well, I'm on their own is doing this for us already. Now when we look at our return on invested capital and this is the main measure. It's one of my Kao criteria. When I invest into companies, I want to have an ROIC Lee's of 10 percent. I'm speaking now, not me as a board board of director member, but really running my own multimillion funds. So that's the expectation and an I'm comparing now this ROIC for those four companies versus their weighted average cost of capital. And we see that for Apple, for example, according to Morningstar, they do a ROIC of 51 percent and that cost of capital is 10 dot 85. So there are 41 points above their cost of capital, which is above risk-free rate, which is above the cause of inflation. So very good performance. Microsoft 33 percent ROIC versus little bit more than 10 percent of cost of capital. So 22 points or nearly 23 points above cost of capital grades. Shareholders can only be happy with Microsoft today carrying. 16% RIC, so 625% with a expected cost of capital of 7.48. And we are with that nearly nine points above cost of capital. So again, the shareholders should be happy with that because carrying is expanding faster than what the cost of its capital is. Very small. I was actually surprised because I owned Reshma, I bought at around 50, so 500 something, it's now at 122. I sold it at 90 plus. And Reshma in fact has an ROIC of photo 85 percent. So this up a little bit more from, I think, the COVID crisis. And, but the expected cost of capital is 674%. So at the current stage of RIC, they are destroying while they're not even covering the cost of capital, which is not good for shareholders. So with that, that you understand how I've been building this up, that money has a cost and that you can for, as a value investor for publicly listed companies, you can calculate what is the cost of capital for the company I'm putting my money into, depending on the industry it is in how the credit rating agencies are looking at the solvency of the company. And I want to put my money in. And also if there is a country specific risk. And with that, I'm going to conclude in the lecture. So remember that money always carries a cost. Remember we discussed in the beginning between lenders and borrowers, there is the cause of inflation. There is a risk premium to that. You need to obviously to define your investment style, you need to define what is your expected return, what is your risk appetite, how liquid you want to be? So how fast you want to maybe transform an asset that you want to sell into cash and also your investment universe. What is your competence, your circle of competence? And then obviously you need to think with those attributes, what is my asset class? Do I want to invest into governmental bonds, into investments, grades, bones into junk bonds to a venture capitalist, am I a public equity investor? I'm a value investor, so I invest into large cap public stocks, US and Europe, and no banks. So that's my investment universe, that's my circle of competence. And remember that all asset classes, they carry an intrinsic return. That's the graph that I'm showing you here, the current intrinsic return. And that intrinsic recurrent caries also an intrinsic level of risk. And by that also the intrinsic level of cost of capital expectations. So wrapping up here, remember that I have other courses you want to go deeper. This is just invest a quick tag. It's a more or less one hour training on a very specific but also a very important strategic topic. In this one, it's about cost of capital. If you want to go deeper, you can either go on my Udemy skillshare school success platforms and look up other courses. But also I do have a YouTube channel where I started to publish freely available content when I do company valuations are things that do not necessarily require to be structured in a train phone. With that, thanks for your attention. I hope that you enjoy it. Do not forget to evaluate the cause as well, please, and talk to you very soon. Thank you.