财务管理ch07 资本成本课件

1、Chapter 07Required Returns and the Cost of Capital要求报酬与资本成本Overall Cost of Capital of the FirmCost of Capital is the required rate of return on the various types of financing. The overall cost of capital is a weighted average of the individual required rates of return (costs).Type of Financing Mkt V

2、alWeightLong-Term Debt $ 35M 35%Preferred Stock$ 15M 15%Common Stock Equity $ 50M 50%$ 100M 100%Market Value of Long-Term FinancingCost of DebtThe cost of debt is the required return on our companys debtWe usually focus on the cost of long-term debt or bondsThe required return is best estimated by c

3、omputing the yield-to-maturity on the existing debtWe may also use estimates of current rates based on the bond rating we expect when we issue new debtThe cost of debt is NOT the coupon rateCost of Debt is the required rate of return on investment of the lenders of a company.ki = kd ( 1 - T )Cost of

4、 DebtP0 =Ij + Pj(1 + kd)jSnj =1Assume that Basket Wonders (BW) has $1,000 par value zero-coupon bonds outstanding. BW bonds are currently trading at $385.54 with 10 years to maturity. BW tax bracket is 40%.Determination of the Cost of DebtDetermination of the Cost of DebtCost of Preferred Stock is t

5、he required rate of return on investment of the preferred shareholders of the company.kP = DP / P0Cost of Preferred StockAssume that Basket Wonders (BW) has preferred stock outstanding with par value of $100, dividend per share of $6.30, and a current market value of $70 per share.Determination of t

6、he Cost of Preferred StockDividend Discount ModelCapital-Asset Pricing ModelBefore-Tax Cost of Debt plus Risk PremiumCost of Equity ApproachesDividend Discount Model The cost of equity capital, ke, is the discount rate that equates the present value of all expected future dividends with the current

7、market price of the stock. D1 D2 D(1+ke)1 (1+ke)2 (1+ke)+ . . . +P0 =Constant Growth Model The constant dividend growth assumption reduces the model to:ke = ( D1 / P0 ) + gAssumes that dividends will grow at the constant rate “g” forever.Assume that Basket Wonders (BW) has common stock outstanding w

8、ith a current market value of $64.80 per share, current dividend of $3 per share, and a dividend growth rate of 8% forever.Determination of the Cost of Equity CapitalCapital Asset Pricing Model The cost of equity capital, ke, is equated to the required rate of return in market equilibrium. The risk-

9、return relationship is described by the Security Market Line (SML).ke = Rj = Rf + (Rm - Rf)bjAssume that Basket Wonders (BW) 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% Determination of the Cost of Equity

10、(CAPM)Before-Tax Cost of Debt Plus Risk Premium The cost of equity 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* Risk premium is not the same as CAPM risk premiumAssume that Basket Wonders (BW) typical

11、ly adds a 3% premium to the before-tax cost of debt. ke =Determination of the Cost of Equity (kd + R.P.)Constant Growth Model13%Capital Asset Pricing Model13%Cost of Debt + Risk Premium13% Generally, the three methods will not agree. Comparison of the Cost of Equity MethodsDividend Growth Model Exam

12、pleSuppose that your company is expected to pay a dividend of $1.50 per share next year. There has been a steady growth in dividends of 5.1% per year and the market expects that to continue. The current price is $25. What is the cost of equity?Example Cost of EquitySuppose our company has a beta of

13、1.5. The market risk premium is expected to be 9% and the current risk-free rate is 6%. We have used analysts estimates to determine that the market believes our dividends will grow at 6% per year and our last dividend was $2. Our stock is currently selling for $15.65. What is our cost of equity?Usi

14、ng SML: RE = 6% + 1.5(9%) = 19.5%Using DGM: RE = 2(1.06) / 15.65 + .06 = 19.55%Cost of Capital = kx(Wx)WACC = .35(6%) + .15(9%) + .50(13%)WACC = .021 + .0135 + .065 = .0995 or 9.95%Weighted Average Cost of Capital (WACC)Snx=11.Weighting SystemMarginal Capital CostsCapital Raised in Different Proport

15、ions than WACCLimitations of the WACC2.Flotation Costs are the costs associated with issuing securities such as underwriting, legal, listing, and printing fees.a.Adjustment to Initial Outlayb.Adjustment to Discount RateLimitations of the WACCAdd Flotation Costs (FC) to the Initial Cash Outlay (ICO).

16、Impact: Reduces the NPVAdjustment to Initial Outlay (AIO)NPV =Snt=1CFt(1 + k)t- ( ICO + FC )Subtract Flotation Costs from the proceeds (price) of the security and recalculate yield figures.Impact: Increases the cost for any capital component with flotation costs.Result: Increases the WACC, which dec

17、reases the NPV.Adjustment to Discount Rate (ADR) 1. Calculate the required return for Project k (all-equity financed).Rk = Rf + (Rm - Rf)bk 2.Adjust for capital structure of thefirm (financing weights).Weighted Average Required Return =ki% of Debt + Rk% of Equity Determining Project-Specific Require

18、d Rate of ReturnAssume 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 11.2% and the r

19、isk-free rate is 4%.Project-Specific Required Rate of Return Example ke = Rf + (Rm - Rf)bj = 4% + (11.2% - 4%)1.5 ke = 4% + 10.8% = 14.8%WACC = .30(6%) + .70(14.8%)= 1.8% + 10.36%= 12.16% IRR = 19% WACC = 12.16%Do You Accept the Project?Extended Example WACC - IEquity Information50 million shares$80

20、 per shareBeta = 1.15Market risk premium = 9%Risk-free rate = 5%Debt Information$1 billion in outstanding debt (face value)Current quote = 110Coupon rate = 9%, semiannual coupons15 years to maturityTax rate = 40%Extended Example WACC - IIWhat is the cost of equity?RE = 5 + 1.15(9) = 15.35%What is th

21、e cost of debt?N = 30; PV = -1100; PMT = 45; FV = 1000; CPT I/Y = 3.9268RD = 3.927(2) = 7.854%What is the after-tax cost of debt?RD(1-TC) = 7.854(1-.4) = 4.712%Extended Example WACC - IIIWhat are the capital structure weights?E = 50 million (80) = 4 billionD = 1 billion (1.10) = 1.1 billionV = 4 + 1.1 = 5.1 billionwE = E/V = 4 / 5.1 = .7843wD = D/V = 1.1 / 5.1 = .2157What is the WACC?WACC = .7843(15.