财务管理英文Cha8课件

1、0chapter 15copyright 2001 prentice-hall, inc.1chapter objectiveslestimate values for the costs of debt and preference shares.lcalculate the wacc.lapply the dividend growth model approach and the sml approach to determine the cost of equity.ldiscuss alternative approaches to estimating a required rat

2、e.ldiscuss the effects of flotation costs on wacc and the npv of a project.copyright 2001 prentice-hall, inc.2the cost of capitallvocabulary - the following all mean the same thing:required returnappropriate discount ratecost of capitallcost of capital is the required rate of return on the various t

3、ypes of financing. the overall cost of capital is a weighted average of the individual required rates of return (costs).copyright 2001 prentice-hall, inc.3the cost of capitallwhen we say a firm has a “cost of capital” of, for example, 12%, we are saying:the firm can only have a positive npv on a pro

4、ject it return exceeds 12%.the firm must earn 12% just to compensate investors for the use of their capital in a project.the use of capital in a project must earn 12% or more, not that it will necessarily cost 12% to borrow funds for the project.lthus cost of capital depends primarily on the use of

5、funds, not the source of funds.copyright 2001 prentice-hall, inc.4l the assumption is made that firms capital structure is fixed - a firms cost of capital then reflects both cost of debt and cost of equity.type of financing mkt valweightlong-term debt $ 35m 35%preferred stock$ 15m 15%common stock eq

6、uity $ 50m 50%$ 100m 100%market value of long-term financingcopyright 2001 prentice-hall, inc.5cost of debtlcost of debt is the required rate of return on investment of the lenders of a company.012nmiiip)1(1)1()1()1(1kkikmkikmpnnniin-=+-+=+=copyright 2001 prentice-hall, inc.6l subtract taxes from th

7、e interest of the bond and recalculate yield figures. a b invest.invest. 10001000 10001000 ebit 200 200 200200-ie 0 50 -ie 0 50 ebt 200 150 50 ebt 200 150 50（1-33%1-33%）-taxes-taxes（t=33%t=33%） 66 - 49.5 66 - 49.5 =16.5 =16.5万万 net income 134 100.5net income 134 100.5adjustment to cost of debtintere

8、st33.5 16.549.5income taxcopyright 2001 prentice-hall, inc.7adjustment to cost of debt)1()1(1ki（1-t）kmpniin=+=lsubtract taxes from the interest of the bond and recalculate yield figures.copyright 2001 prentice-hall, inc.8flotation costslthe cost of implementing any financing decision must be incorpo

9、rated into the cash flows of the project being evaluated.lonly the incremental costs of financing should be included. such as underwriting, legal, listing, and printing fees.lsubtract flotation costs from the price of the security and recalculate yield figures.)1()1(1ki（1-t）kmp-fniin=+=copyright 200

10、1 prentice-hall, inc.9lcost of preferred stock is the required rate of return on investment of the preferred shareholders of the company.cost of preferred stock012ndddpp-f)1(1kdnii=+=kdcopyright 2001 prentice-hall, inc.10 example assume that basket wonders (bw) has preferred stock outstanding with p

11、ar value of $100, dividend per share of $6.30, and a current market value of $70 per share.? kp = $6.30 / $70 kp = 9%determination of the cost of preferred stockcopyright 2001 prentice-hall, inc.11cost of equity approachescopyright 2001 prentice-hall, inc.12l the , ke, is the discount rate that equa

12、tes the present value of all expected future dividends with the current market price of the stock. d1 d2 d(1+ke)1 (1+ke)2 (1+ke)+ . . . +p0 = dividend discount modelcopyright 2001 prentice-hall, inc.13lthe reduces the model to:ke = ( d1 / p0 ) + glassumes that dividends will grow at the constant rat

13、e “g” forever. “g” depends on historical average.constant growth modelcopyright 2001 prentice-hall, inc.14 example assume that basket wonders (bw) has common stock outstanding with a current market value of $64.80 per share, current dividend of $3 per share, and a dividend growth rate of 8% forever.

14、?ke = ( d1 / p0 ) + g ke = ($3(1.08) / $64.80) + .08 = .05 + .08 = or determination of the cost of equity capitalcopyright 2001 prentice-hall, inc.15 d0(1+g1)t da(1+g2)t-a(1+ke)t (1+ke)tp0 =lthe s s+ + s st=1at=a+1bt=b+1 db(1+g3)t-b(1+ke)t+s sgrowth phases modelcopyright 2001 prentice-hall, inc.16lt

15、he cost of equity capital, ke, is equated to the required rate of return in market equilibrium. the risk-return relationship is described by the security market line (sml).ke = rj = rf + (rm - rf)bjcapital asset pricing modelcopyright 2001 prentice-hall, inc.17 example assume that basket wonders (bw

16、) has a company beta of 1.25. research by julie miller suggests that the risk-free rate is 4% and the expected return on the market is 11.2% .? ke = rf + (rm - rf) bj = 4% + (11.2% - 4%)1.25 = 4% + 9% = determination of the cost of equity (capm)copyright 2001 prentice-hall, inc.18lthe cost of equity

17、 capital, ke, is the sum of the before-tax cost of debt and a risk premium in expected return for common stock over debt. ke = kd + risk premium*m risk premium is not the same as capm risk premium.before-tax cost of debt plus risk premiumcopyright 2001 prentice-hall, inc.19 example assume that baske

18、t wonders (bw) typically adds a 3% premium to the before-tax cost of debt. ? ke = kd + risk premium = 10% + 3% = determination of the cost of equity (kd + r.p.)copyright 2001 prentice-hall, inc.20wacclweighted average cost of capital (wacc) - the expected rate of return on a portfolio of all the fir

19、ms securities.company cost of capital = weighted average of debt and equity returns.copyright 2001 prentice-hall, inc.21wacclthree steps to calculating cost of capital:1. calculate the value of each security as a proportion of the firms market value.2. determine the required rate of return on each s

20、ecurity.3. calculate a weighted average of these required returns.copyright 2001 prentice-hall, inc.22weighted average cost of capital (wacc)1kiwikwni=kwwacc；ki the after-tax cost of the ith method of financing；wi the weight given to the ith method of financing。copyright 2001 prentice-hall, inc.23la

21、 measure of business performance.lit is another way of measuring that firms are earning returns on their invested capital that exceed their cost of capital.lspecific measure developed by stern stewart & company in late 1980s.lit is a firms net operating profit after tax (nopat) minus a dollar-am

22、ount cost of capital charge for the capital employed.economic value addedcopyright 2001 prentice-hall, inc.24lsince a cost is charged for equity capital also, a positive eva generally indicates shareholder value is being created.lbased on economic not accounting profit.economic value addedeva = nopa

23、t cost of capital x capital employed = ebit(1-t) kwccopyright 2001 prentice-hall, inc.25l use of capm in project selectioninitially assume all-equity financing.determine project beta.calculate the expected return.adjust for capital structure of firm.compare cost to irr of project.determining project

24、-specific required rates of returncopyright 2001 prentice-hall, inc.26difficulty in determining the expected returnldetermining the smllocate a proxy for the project (much easier if asset is traded).plot the characteristic line relationship between the market portfolio and the proxy asset excess ret

25、urns.estimate beta and create the sml.copyright 2001 prentice-hall, inc.27project acceptance and/or rejectionsmlxxxxxxxooooooosystematic risk (beta)expected rate of returnrfacceptrejectcopyright 2001 prentice-hall, inc.28examplelsuppose the stock of stansfield enterprises, a publisher of powerpoint

26、presentations, has a beta of 2.5. the firm is 100-percent equity financed. lassume a risk-free rate of 5-percent and a market risk premium of 10-percent.lwhat is the appropriate discount rate for an expansion of this firm?)(fmifrrrr-+=%105 . 2%5+=r%30=rcopyright 2001 prentice-hall, inc.29example (co

27、ntinued)suppose stansfield enterprises is evaluating the following non-mutually exclusive projects. each costs $100 and lasts one year.projectproject b bprojects estimated cash flows next yearirrnpv at 30%a2.5$15050%$15.38b2.5$13030%$0c2.5$11010%-$15.38copyright 2001 prentice-hall, inc.30using the s

28、ml to estimate the risk-adjusted discount rate for projectsan all-equity firm should accept a project whose irr exceeds the cost of equity capital and reject projects whose irrs fall short of the cost of capital.project irrfirms risk (beta)sml5%good projectbad project30%2.5abccopyright 2001 prentice

29、-hall, inc.311. calculate the required return for project k (all-equity financed).rk = rf + (rm - rf)bk2. adjust for capital structure of the firm (financing weights).weighted average required return = ki% of debt + rk% of equity determining project-specific required rate of returncopyright 2001 pre

30、ntice-hall, inc.32 example assume a computer networking project is being considered with an irr of 19%. examination of firms in the networking industry allows us to estimate an all-equity beta of 1.5. our firm is financed with 70% equity and 30% debt at ki=6%. the expected return on the market is 11

31、.2% and the risk-free rate is 4%.project-specific required rate of return examplecopyright 2001 prentice-hall, inc.33? ke = rf + (rm - rf)bj = 4% + (11.2% - 4%)1.5 = 4% + 10.8% = wacc = .30(6%) + .70(14.8%) = 1.8% + 10.36% = 12.16% irr = 19% wacc = 12.16%do you accept the project?copyright 2001 pren

32、tice-hall, inc.34determining group-specific required rates of returnluse of capm in project selection:initially assume all-equity financing.determine group beta.calculate the expected return.adjust for capital structure of group.compare cost to irr of group project.copyright 2001 prentice-hall, inc.

33、35comparing group-specific required rates of returngroup-specificrequired returnscompany costof capitalsystematic risk (beta)expected rate of returncopyright 2001 prentice-hall, inc.36lamount of non-equity financing relative to the proxy firm. adjust project beta if necessary.lstandard problems in t

34、he use of capm. potential insolvency is a total-risk problem rather than just systematic risk (capm).qualifications to using group-specific ratescopyright 2001 prentice-hall, inc.37ladjusted present value (apv) is the sum of the discounted value of a projects operating cash flows plus the value of a

35、ny tax-shield benefits of interest associated with the projects financing minus any flotation costs.adjusted present valueapv = unleveredproject value+value ofproject financingcopyright 2001 prentice-hall, inc.38 adjusted present valueapv = npv + npvflthe value of a project to the firm can be though

36、t of as the value of the project to an unlevered firm (npv) plus the present value of the financing side effects (npvf):lthere are four side effects of financing:the tax subsidy to debtthe costs of issuing new securitiesthe costs of financial distresssubsidies to debt financingcopyright 2001 prentic

37、e-hall, inc.39 example assume basket wonders is considering a new $425,000 automated basket weaving machine that will save $100,000 per year for the next 6 years. the required rate on unlevered equity is 11%. bw can borrow $180,000 at 7% with $10,000 after-tax flotation costs. principal is repaid at

38、 $30,000 per year (+ interest). the firm is in the 40% tax bracket. npv and apv examplecopyright 2001 prentice-hall, inc.40?what is the npv?basket wonders npv solutioncopyright 2001 prentice-hall, inc.41? what is the apv? first, determine the interest expense.int yr 1($180,000)(7%) = $12,600int yr 2

39、( 150,000)(7%) = 10,500int yr 3( 120,000)(7%) = 8,400int yr 4( 90,000)(7%) = 6,300int yr 5( 60,000)(7%) = 4,200int yr 6( 30,000)(7%) = 2,100basket wonders apv solutioncopyright 2001 prentice-hall, inc.42? second, calculate the tax-shield benefits.tsb yr 1($12,600)(40%) = $5,040tsb yr 2( 10,500)(40%)

40、 = 4,200tsb yr 3( 8,400)(40%) = 3,360tsb yr 4( 6,300)(40%) = 2,520tsb yr 5( 4,200)(40%) = 1,680tsb yr 6( 2,100)(40%) = 840basket wonders apv solutioncopyright 2001 prentice-hall, inc.43? third, find the pv of the tax-shield benefits.tsb yr 1($5,040)(.901) = $4,541tsb yr 2( 4,200)(.812) = 3,410tsb yr

41、 3( 3,360)(.731) = 2,456tsb yr 4( 2,520)(.659) = 1,661tsb yr 5( 1,680)(.593) = 996tsb yr 6( 840)(.535) = 449 pv = $13,513basket wonders apv solutioncopyright 2001 prentice-hall, inc.44? what is the apv?basket wonders npv solutioncopyright 2001 prentice-hall, inc.45apv example example worldwide trous

42、ers, inc. is considering replacing a $5 million piece of equipment. the initial expense will be depreciated straight-line to zero salvage value over 5 years; the pretax salvage value in year 5 will be $500,000. the project will generate pretax savings of $1,500,000 per year, and not change the risk

43、level of the firm. the firm can obtain a 5-year $3,000,000 loan at 12.5% to partially finance the project. if the project were financed with all equity, the cost of capital would be 18%. the corporate tax rate is 34%, and the risk-free rate is 4%. the project will require a $100,000 investment in ne

44、t working capital. calculate the apv.copyright 2001 prentice-hall, inc.46apv example: cost25.561,873, 4$)1 ()34.1 (000,500)1 (000,1001 . 5$505-=+-+-=rrmcostfthe cost of the project is not $5,000,000.we must include the round trip in and out of net working capital and the after-tax salvage value. ? l

45、ets work our way through the four terms in this equation:nwc is riskless, so we discount it at rf . salvage value should have the same risk as the rest of the firms assets, so we use r0.+ pv depreciationtax shield+ pv interesttax shieldpv unleveredprojectapv = cost +copyright 2001 prentice-hall, inc

46、.47apv example: pv unlevered project? turning our attention to the second term,899,095, 3$)18. 1 ()34.1 (5 . 1$)1 (5151=-=+=projectunleveredttttotprojectunleveredpvmrucfpv +pv depreciationtax shield +pv interesttax shieldpv unleveredprojectapv = $4,873,561.25+is the present value of the unlevered ca

47、sh flows discounted at the unlevered cost of capital, 18%.pv unleveredprojectcopyright 2001 prentice-hall, inc.48apv example: pv depreciation tax shield? turning our attention to the third term,619,513, 1$)04. 1 (34.1$)1 (5151=+=ttttfcmrtd is the present value of the tax savings due to depreciation discounted at the risk free rate: rf = 4%pv