公司理财原版英文课件Chap013

1、risk, cost of capital, and capital budgetingchapter 13copyright 2010 by the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13-1key concepts and skillsoknow how to determine a firms cost of equity capitalounderstand the impact of beta in determining the firms cost of equity capitalo

2、know how to determine the firms overall cost of capitalounderstand the impact of flotation costs on capital budgeting13-2chapter outline13.1 the cost of equity capital13.2 estimating the cost of equity capital with the capm13.3 estimation of beta13.4 beta, covariance and correlation13.5determinants

3、of beta13.6dividend discount model13.7cost of capital for divisions and projects13.8cost of fixed income securities13.9the weighted average cost of capital13.10estimating eastman chemicals cost of capital13.11flotation costs and the weighted average cost of capital13-3where do we stand?oearlier chap

4、ters on capital budgeting focused on the appropriate size and timing of cash flows.othis chapter discusses the appropriate discount rate when cash flows are risky.13-4invest in project13.1 the cost of equity capitalfirm withexcess cashshareholders terminal valuepay cash dividendshareholder invests i

5、n financial assetbecause stockholders can reinvest the dividend in risky financial assets, the expected return on a capital-budgeting project should be at least as great as the expected return on a financial asset of comparable risk.a firm with excess cash can either pay a dividend or make a capital

6、 investment13-5the cost of equity capitalofrom the firms perspective, the expected return is the cost of equity capital:)(fmifirrrr to estimate a firms cost of equity capital, we need to know three things:1. the risk-free rate, rffmrr2. the market risk premium,2,)(),(mmimmiirvarrrcov3. the company b

7、eta,13-6exampleosuppose the stock of stansfield enterprises, a publisher of powerpoint presentations, has a beta of 2.5. the firm is 100% equity financed. oassume a risk-free rate of 5% and a market risk premium of 10%.owhat is the appropriate discount rate for an expansion of this firm?)(fmifrrrr%1

8、05 . 2%5r%30r13-7example suppose stansfield enterprises is evaluating the following independent projects. each costs $100 and lasts one year.projectproject bprojects estimated cash flows next yearirrnpv at 30%a2.5$15050%$15.38b2.5$13030%$0c2.5$11010%-$15.3813-8using the sml an all-equity firm should

9、 accept projects whose irrs exceed 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%2.5abc13-9the risk-free rateotreasury securities are close proxies for the risk-free rate.othe capm is a period mo

10、del. however, projects are long-lived. so, average period (short-term) rates need to be used.othe historic premium of long-term (20-year) rates over short-term rates for government securities is 2%.oso, the risk-free rate to be used in the capm could be estimated as 2% below the prevailing rate on 2

11、0-year treasury securities.13-10the market risk premiumomethod 1: use historical dataomethod 2: use the dividend discount modelnmarket data and analyst forecasts can be used to implement the ddm approach on a market-wide basisgprd113-1113.3 estimation of betamarket portfolio - portfolio of all asset

12、s in the economy. in practice, a broad stock market index, such as the s&p 500, is used to represent the market.beta - sensitivity of a stocks return to the return on the market portfolio.13-12estimation of beta)(),(mmirvarrrcov problems1. betas may vary over time.2. the sample size may be inade

13、quate.3. betas are influenced by changing financial leverage and business risk.solutionsproblems 1 and 2 can be moderated by more sophisticated statistical techniques.problem 3 can be lessened by adjusting for changes in business and financial risk.look at average beta estimates of comparable firms

14、in the industry.13-13stability of betaomost analysts argue that betas are generally stable for firms remaining in the same industry.othat is not to say that a firms beta cannot change.nchanges in product linenchanges in technologynderegulationnchanges in financial leverage13-14using an industry beta

15、oit is frequently argued that one can better estimate a firms beta by involving the whole industry.oif you believe that the operations of the firm are similar to the operations of the rest of the industry, you should use the industry beta.oif you believe that the operations of the firm are fundament

16、ally different from the operations of the rest of the industry, you should use the firms beta.odo not forget about adjustments for financial leverage.13-1513.4 beta, covariance and correlationobeta is qualitatively similar to the covariance since the denominator (market variance) is a constant.obeta

17、 and correlation are related, but different. it is possible that a stock could be highly correlated to the market, but it could have a low beta if its deviation were relatively small. )()()()(2,mimmiirrrrrcovb13-1613.5 determinants of betaobusiness riskncyclicality of revenuesnoperating leverageofin

18、ancial risknfinancial leverage13-17cyclicality of revenuesohighly cyclical stocks have higher betas.nempirical evidence suggests that retailers and automotive firms fluctuate with the business cycle.ntransportation firms and utilities are less dependent on the business cycle.onote that cyclicality i

19、s not the same as variabilitystocks with high standard deviations need not have high betas.nmovie studios have revenues that are variable, depending upon whether they produce “hits” or “flops,” but their revenues may not be especially dependent upon the business cycle.13-18operating leverageothe deg

20、ree of operating leverage measures how sensitive a firm (or project) is to its fixed costs. ooperating leverage increases as fixed costs rise and variable costs fall.ooperating leverage magnifies the effect of cyclicality on beta.othe degree of operating leverage is given by:dol = ebitd salessalesd

21、ebit13-19operating leveragesales$fixed coststotal costsd ebitd salesoperating leverage increases as fixed costs rise and variable costs fall.fixed coststotal costs13-20financial leverage and betaooperating leverage refers to the sensitivity to the firms fixed costs of production.ofinancial leverage

22、is the sensitivity to a firms fixed costs of financing.othe relationship between the betas of the firms debt, equity, and assets is given by: financial leverage always increases the equity beta relative to the asset beta.basset = debt + equitydebt bdebt + debt + equityequity bequity13-21exampleconsi

23、der grand sport, inc., which is currently all-equity financed and has a beta of 0.90.the firm has decided to lever up to a capital structure of 1 part debt to 1 part equity.since the firm will remain in the same industry, its asset beta should remain 0.90.however, assuming a zero beta for its debt,

24、its equity beta would become twice as large:basset = 0.90 = 1 + 11 bequitybequity = 2 0.90 = 1.8013-2213.6 dividend discount modelothe ddm is an alternative to the capm for calculating a firms cost of equity.othe ddm and capm are internally consistent, but academics generally favor the capm and comp

25、anies seem to use the capm more consistently. nthis may be due to the measurement error associated with estimating company growth.gprd113-23capital budgeting & project riska firm that uses one discount rate for all projects may over time increase the risk of the firm while decreasing its value.p

26、roject irrfirms risk (beta)smlrfbfirmincorrectly rejected positive npv projectsincorrectly accepted negative npv projectshurdle rate)(fmfirmfrrrthe sml can tell us why:13-24suppose the conglomerate company has a cost of capital, based on the capm, of 17%. the risk-free rate is 4%, the market risk pr

27、emium is 10%, and the firms beta is 1.3.17% = 4% + 1.3 10% this is a breakdown of the companys investment projects:1/3 automotive retailer b = 2.01/3 computer hard drive manufacturer b = 1.31/3 electric utility b = 0.6average b of assets = 1.3when evaluating a new electrical generation investment, w

28、hich cost of capital should be used?capital budgeting & project risk13-25capital budgeting & project riskproject irrprojects risk (b)17%1.32.00.6r = 4% + 0.6(14% 4% ) = 10% 10% reflects the opportunity cost of capital on an investment in electrical generation, given the unique risk of the pr

29、oject.10%24%investments in hard drives or auto retailing should have higher discount rates.sml13-26cost of debtointerest rate required on new debt issuance (i.e., yield to maturity on outstanding debt)oadjust for the tax deductibility of interest expense13-27cost of preferred stockopreferred stock i

30、s a perpetuity, so its price is equal to the coupon paid divided by the current required return.orearranging, the cost of preferred stock is:nrp = c / pv13-2813.9 the weighted average cost of capitalothe weighted average cost of capital is given by: because interest expense is tax-deductible, we mul

31、tiply the last term by (1 tc).rwacc = equity + debt equity requity + equity + debt debt rdebt (1 tc)rwacc = s + bs rs + s + bb rb (1 tc)13-29example: international paperofirst, we estimate the cost of equity and the cost of debt.nwe estimate an equity beta to estimate the cost of equity.nwe can ofte

32、n estimate the cost of debt by observing the ytm of the firms debt.osecond, we determine the wacc by weighting these two costs appropriately.13-30example: international paperothe industry average beta is 0.82, the risk free rate is 3%, and the market risk premium is 8.4%. othus, the cost of equity capital is: rs = rf + bi ( rm rf)= 3% + 0.828.4%= 9.89%13-31example: international paperothe yield on the companys debt is 8%, and the firm has a 37% marginal tax rate.