风险,资本,成本和资本预算讲义(英文) (2)ppt课件

1、Risk, Cost of Capital, and Capital BudgetingKey Concepts and SkillsKnow how to determine a firms cost of equity capitalUnderstand the impact of beta in determining the firms cost of equity capitalKnow how to determine the firms overall cost of capitalUnderstand how the liquidity of a firms stock aff

2、ects its cost of capitalChapter Outline12.1 The Cost of Equity Capital12.2 Estimation of Beta12.3 Determinants of Beta12.4 Extensions of the Basic Model12.5 Estimating Eastman Chemicals Cost of Capital12.6 Reducing the Cost of CapitalWhere Do We Stand?Earlier chapters on capital budgeting focused on

3、 the appropriate size and timing of cash flows.This chapter discusses the appropriate discount rate when cash flows are risky.Invest in project12.1 The Cost of Equity CapitalFirm withexcess cashShareholders Terminal ValuePay cash dividendShareholder invests in financial assetBecause stockholders can

4、 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 investmentThe Cost of Equity CapitalFrom

5、 the firms perspective, the expected return is the Cost of Equity Capital:To estimate a firms cost of equity capital, we need to know three things:The risk-free rate, RFThe market risk premium,The company beta,ExampleSuppose the stock of Stansfield Enterprises, a publisher of presentations, has a be

6、ta of 2.5. The firm is 100% equity financed. Assume a risk-free rate of 5% and a market risk premium of 10%.What is the appropriate discount rate for an expansion of this firm?Example Suppose Stansfield Enterprises is evaluating the following independent projects. Each costs $100 and lasts one year.

7、ProjectProject bProjects Estimated Cash Flows Next YearIRRNPV at 30%A2.5$15050%$15.38B2.5$13030%$0C2.5$11010%-$15.38Using the SML An all-equity firm should accept projects whose IRRs exceed the cost of equity capital and reject projects whose IRRs fall short of the cost of capital.Project IRRFirms r

8、isk (beta)5%Good projectBad project30%2.5ABC12.2 Estimation of BetaMarket Portfolio - Portfolio of all assets in the economy. In practice, a broad stock market index, such as the S&P Composite, is used to represent the market.Beta - Sensitivity of a stocks return to the return on the market portfoli

9、o.Estimation of BetaProblemsBetas may vary over time.The sample size may be inadequate.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 b

10、usiness and financial risk.Look at average beta estimates of comparable firms in the industry.Stability of BetaMost analysts argue that betas are generally stable for firms remaining in the same industry.That is not to say that a firms beta cannot change.Changes in product lineChanges in technologyD

11、eregulationChanges in financial leverageUsing an Industry BetaIt is frequently argued that one can better estimate a firms beta by involving the whole industry.If 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.I

12、f you believe that the operations of the firm are fundamentally different from the operations of the rest of the industry, you should use the firms beta.Do not forget about adjustments for financial leverage.12.3 Determinants of BetaBusiness RiskCyclicality of RevenuesOperating LeverageFinancial Ris

13、kFinancial LeverageCyclicality of RevenuesHighly cyclical stocks have higher betas.Empirical evidence suggests that retailers and automotive firms fluctuate with the business cycle.Transportation firms and utilities are less dependent upon the business cycle.Note that cyclicality is not the same as

14、variabilitystocks with high standard deviations need not have high betas.Movie 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.Operating LeverageThe degree of operating leverage m

15、easures how sensitive a firm (or project) is to its fixed costs. Operating leverage increases as fixed costs rise and variable costs fall.Operating leverage magnifies the effect of cyclicality on beta.The degree of operating leverage is given by:DOL = EBITD SalesSalesD EBITOperating LeverageSales$Fi

16、xed costsTotal costs EBIT SalesOperating leverage increases as fixed costs rise and variable costs fall.Fixed costsTotal costsFinancial Leverage and BetaOperating leverage refers to the sensitivity to the firms fixed costs of production.Financial leverage is the sensitivity to a firms fixed costs of

17、 financing.The 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 bEquityExampleConsider Grand Sport, Inc., which is currently all-equit

18、y 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, its equity beta would become twice as large:bAsset

19、= 0.90 = 1 + 11 bEquitybEquity = 2 0.90 = 1.8012.4 Extensions of the Basic ModelThe Firm versus the ProjectThe Cost of Capital with DebtThe Firm versus the ProjectAny projects cost of capital depends on the use to which the capital is being putnot the source. Therefore, it depends on the risk of the

20、 project and not the risk of the company. Capital 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.Project IRRFirms risk (beta)rfbFIRMIncorrectly rejected positive NPV projectsIncorrectly accepted negat

21、ive NPV projectsHurdle rateThe SML can tell us why:Suppose the Conglomerate Company has a cost of capital, based on the CAPM, of 17%. The risk-free rate is 4%, the market risk premium 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 Aut

22、omotive 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, which cost of capital should be used?Capital Budgeting & Project RiskCapital Budgeting & Project RiskProject IRRProjects ri

23、sk (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 project.10%24%Investments in hard drives or auto retailing should have higher discount rates.SMLThe Cost of Capital with DebtThe Weighted

24、 Average Cost of Capital is given by:Because interest expense is tax-deductible, we multiply 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)Example: International PaperFirst, we estimate the cost of equity and the cos

25、t of debt.We estimate an equity beta to estimate the cost of equity.We can often estimate the cost of debt by observing the YTM of the firms debt.Second, we determine the WACC by weighting these two costs appropriately.Example: International PaperThe industry average beta is 0.82, the risk free rate

26、 is 3%, and the market risk premium is 8.4%. Thus, the cost of equity capital is: rS = RF + bi ( RM RF)= 3% + .828.4%= 9.89%Example: International PaperThe yield on the companys debt is 8%, and the firm has a 37% marginal tax rate.The debt to value ratio is 32%8.34% is Internationals cost of capital

27、. It should be used to discount any project where one believes that the projects risk is equal to the risk of the firm as a whole and the project has the same leverage as the firm as a whole.= 0.68 9.89% + 0.32 8% (1 0.37) = 8.34%rWACC = S + BS rS + S + BB rB (1 TC)12.6 Reducing the Cost of CapitalW

28、hat is Liquidity?Liquidity, Expected Returns and the Cost of CapitalLiquidity and Adverse SelectionWhat the Corporation Can DoWhat is Liquidity?The idea that the expected return on a stock and the firms cost of capital are positively related to risk is fundamental.Recently, a number of academics hav

29、e argued that the expected return on a stock and the firms cost of capital are negatively related to the liquidity of the firms shares as well.The trading costs of holding a firms shares include brokerage fees, the bid-ask spread and market impact costs.Liquidity, Expected Returns and the Cost of Ca

30、pitalThe cost of trading an illiquid stock reduces the total return that an investor receives.Investors will thus demand a high expected return when investing in stocks with high trading costs.This high expected return implies a high cost of capital to the firm.Liquidity and the Cost of CapitalCost

31、of CapitalLiquidityAn increase in liquidity (i.e., a reduction in trading costs) lowers a firms cost of capital.Liquidity and Adverse SelectionThere are a number of factors that determine the liquidity of a stock.One of these factors is adverse selection.This refers to the notion that traders with b

32、etter information can take advantage of specialists and other traders who have less information.The greater the heterogeneity of information, the wider the bid-ask spreads, and the higher the required return on equity.What the Corporation Can DoThe corporation has an incentive to lower trading costs

33、 since this would result in a lower cost of capital.A stock split would increase the liquidity of the shares.A stock split would also reduce the adverse selection costs, thereby lowering bid-ask spreads.This idea is a new one, and empirical evidence is not yet available.What the Corporation Can DoCo

34、mpanies can also facilitate stock purchases through the Internet.Direct stock purchase plans and dividend reinvestment plans handled on-line allow small investors the opportunity to buy securities cheaply.Companies can also disclose more information, especially to security analysts to narrow the gap

35、 between informed and uninformed traders. This should reduce spreads.Quick QuizHow do we determine the cost of equity capital?How can we estimate a firm or project beta?How does leverage affect beta?How do we determine the cost of capital with debt?How does the liquidity of a firms stock affect the

36、cost of capital?1. With the information given, we can find the cost of equity using the CAPM. The cost of equity is:RE = .045 + 1.30 (.13 .045) = .1555 or 15.55%3. a. The pretax cost of debt is the YTM of the companys bonds, so:P0= $1,080 = $50(PVIFAR%,46) + $1,000(PVIFR%,46)R = 4.58%YTM = 2 4.58% =

37、 9.16%b. The aftertax cost of debt is:RD= .0916(1 .35) = .0595 or 5.95%c. The aftertax rate is more relevant because that is the actual cost to the company.5. Using the equation to calculate the WACC, we find:WACC = .55(.16) + .45(.09)(1 .35) = .1143 or 11.43%8. a. The book value of equity is the bo

38、ok value per share times the number of shares, and the book value of debt is the face value of the companys debt, so:BVE = 9.5M($5) = $47.5MBVD = $75M + 60M = $MSo, the total value of the company is:V = $47.5M + M = $182.5MAnd the book value weights of equity and debt are:E / V = $47.5/$182.5 = .260

39、3D / V = 1 E/V = .7397b. The market value of equity is the share price times the number of shares, so:MVE = 9.5M($53) = $503.5MUsing the relationship that the total market value of debt is the price quote times the par value of the bond, we find the market value of debt is:MVD = .93($75M) + .965($60

40、M) = $127.65MThis makes the total market value of the company:V = $503.5M + 127.65M = $631.15MAnd the market value weights of equity and debt are:E/V = $503.5/$631.15 = .7978D/V = 1 E/V = .2022c. The market value weights are more relevant.11. We will begin by finding the market value of each type of

41、 financing. We find:MVD = 4,000($1,000)(1.03) = $4,120,000MVE = 90,000($57) = $5,130,000And the total market value of the firm is:V = $4,120,000 + 5,130,000 = $9,250,000Now, we can find the cost of equity using the CAPM. The cost of equity is:RE = .06 + 1.10(.08) = .1480 or 14.80%The cost of debt is

42、 the YTM of the bonds, so:P0 = $1,030 = $35(PVIFAR%,40) + $1,000(PVIFR%,40)R = 3.36%YTM = 3.36% 2 = 6.72%And the aftertax cost of debt is:RD = (1 .35)(.0672) = .0437 or 4.37%Now we have all of the components to calculate the WACC. The WACC is:WACC = .0437(4.12/9.25) + .1480(5.13/9.25) = .1015 or 10.

43、15%13. a. Projects X, Y and Z.b. Using the CAPM to consider the projects, we need to calculate the expected return of each project given its level of risk. This expected return should then be compared to the expected return of the project. If the return calculated using the CAPM is higher than the project expected return, we should accept the project; if not, we reject the project. After considering risk via the CAPM:EW = .05 + .60(.12 .05) = .0920 .11, s