第十二章-风险、资本成本和资本预算

第十二章风险、资本成本和资本预算What’stheBigIdea?Earlierchaptersoncapitalbudgetingfocusedontheappropriatesizeandtimingofcashflows.Thischapterdiscussestheappropriatediscountratewhencashflowsarerisky.Investinproject12.1TheCostofEquityCapitalFirmwith

excesscashShareholder’sTerminalValuePaycashdividendShareholderinvestsinfinancialassetBecausestockholderscanreinvestthedividendinriskyfinancialassets,theexpectedreturnonacapital-budgetingprojectshouldbeatleastasgreatastheexpectedreturnonafinancialassetofcomparablerisk.AfirmwithexcesscashcaneitherpayadividendormakeacapitalinvestmentTheCostofEquityFromthefirm’sperspective,theexpectedreturnistheCostofEquityCapital:Toestimateafirm’scostofequitycapital,weneedtoknowthreethings:Therisk-freerate,RFThemarketriskpremium,Thecompanybeta,ExampleSupposethestockofStansfieldEnterprises,apublisherofPowerPointpresentations,hasabetaof2.5.Thefirmis100-percentequityfinanced.Assumearisk-freerateof5-percentandamarketriskpremiumof10-percent.Whatistheappropriatediscountrateforanexpansionofthisfirm?Example(continued)SupposeStansfieldEnterprisesisevaluatingthefollowingnon-mutuallyexclusiveprojects.Eachcosts$100andlastsoneyear.ProjectProjectbProject’sEstimatedCashFlowsNextYearIRRNPVat30%A2.5$15050%$15.38B2.5$13030%$0C2.5$11010%-$15.38UsingtheSMLtoEstimatetheRisk-AdjustedDiscountRateforProjects

Anall-equityfirmshouldacceptaprojectwhoseIRRexceedsthecostofequitycapitalandrejectprojectswhoseIRRsfallshortofthecostofcapital.ProjectIRRFirm’srisk(beta)5%GoodprojectsBadprojects30%2.5ABC12.2EstimationofBeta:MeasuringMarketRiskMarketPortfolio-Portfolioofallassetsintheeconomy.Inpracticeabroadstockmarketindex,suchastheS&PComposite,isusedtorepresentthemarket.Beta-Sensitivityofastock’sreturntothereturnonthemarketportfolio.12.2EstimationofBetaTheoretically,thecalculationofbetaisstraightforward:ProblemsBetasmayvaryovertime.Thesamplesizemaybeinadequate.Betasareinfluencedbychangingfinancialleverageandbusinessrisk.SolutionsProblems1and2(above)canbemoderatedbymoresophisticatedstatisticaltechniques.Problem3canbelessenedbyadjustingforchangesinbusinessandfinancialrisk.Lookataveragebetaestimatesofcomparablefirmsintheindustry.StabilityofBetaMostanalystsarguethatbetasaregenerallystableforfirmsremaininginthesameindustry.That’snottosaythatafirm’sbetacan’tchange.ChangesinproductlineChangesintechnologyDeregulationChangesinfinancialleverageUsinganIndustryBetaItisfrequentlyarguedthatonecanbetterestimateafirm’sbetabyinvolvingthewholeindustry.Ifyoubelievethattheoperationsofthefirmaresimilartotheoperationsoftherestoftheindustry,youshouldusetheindustrybeta.Ifyoubelievethattheoperationsofthefirmarefundamentallydifferentfromtheoperationsoftherestoftheindustry,youshouldusethefirm’sbeta.Don’tforgetaboutadjustmentsforfinancialleverage.12.3DeterminantsofBetaBusinessRiskCyclicityofRevenuesOperatingLeverageFinancialRiskFinancialLeverageCyclicalityofRevenuesHighlycyclicalstockshavehighbetas.Empiricalevidencesuggeststhatretailersandautomotivefirmsfluctuatewiththebusinesscycle.Transportationfirmsandutilitiesarelessdependentuponthebusinesscycle.Notethatcyclicalityisnotthesameasvariability—stockswithhighstandarddeviationsneednothavehighbetas.Moviestudioshaverevenuesthatarevariable,dependinguponwhethertheyproduce“hits”or“flops”,buttheirrevenuesarenotespeciallydependentuponthebusinesscycle.OperatingLeverageThedegreeofoperatingleveragemeasureshowsensitiveafirm(orproject)istoitsfixedcosts.Operatingleverageincreasesasfixedcostsriseandvariablecostsfall.Operatingleveragemagnifiestheeffectofcyclicityonbeta.Thedegreeofoperatingleverageisgivenby:OperatingLeverageVolume$FixedcostsTotalcosts

EBIT

VolumeOperatingleverageincreasesasfixedcostsriseandvariablecostsfall.FixedcostsTotalcostsFinancialLeverageandBetaOperatingleveragereferstothesensitivitytothefirm’sfixedcostsofproduction.Financialleverageisthesensitivityofafirm’sfixedcostsoffinancing.Therelationshipbetweenthebetasofthefirm’sdebt,equity,andassetsisgivenby:Financialleveragealwaysincreasestheequitybetarelativetotheassetbeta.FinancialLeverageandBeta:ExampleConsiderGrandSport,Inc.,whichiscurrentlyall-equityandhasabetaof0.90.Thefirmhasdecidedtoleveruptoacapitalstructureof1partdebtto1partequity.Sincethefirmwillremaininthesameindustry,itsassetbetashouldremain0.90.However,assumingazerobetaforitsdebt,itsequitybetawouldbecometwiceaslarge:12.4ExtensionsoftheBasicModelTheFirmversustheProjectTheCostofCapitalwithDebtTheFirmversustheProjectAnyproject’scostofcapitaldependsontheusetowhichthecapitalisbeingput—notthesource.Therefore,itdependsontheriskoftheprojectandnottheriskofthecompany.CapitalBudgeting&ProjectRiskAfirmthatusesonediscountrateforallprojectsmayovertimeincreasetheriskofthefirmwhiledecreasingitsvalue.ProjectIRRFirm’srisk(beta)rfbFIRMIncorrectlyrejectedpositiveNPVprojectsIncorrectlyacceptednegativeNPVprojectsHurdlerateTheSMLcantelluswhy:SupposetheConglomerateCompanyhasacostofcapital,basedontheCAPM,of17%.Therisk-freerateis4%;themarketriskpremiumis10%andthefirm’sbetais1.3.17%=4%+1.3×[14%–4%]Thisisabreakdownofthecompany’sinvestmentprojects:1/3Automotiveretailerb=2.01/3ComputerHardDriveMfr.b=1.31/3ElectricUtilityb=0.6averagebofassets=1.3Whenevaluatinganewelectricalgenerationinvestment,whichcostofcapitalshouldbeused?CapitalBudgeting&ProjectRiskCapitalBudgeting&ProjectRiskProjectIRRFirm’srisk(beta)17%1.32.00.6r=4%+0.6×(14%–4%)=10%10%reflectstheopportunitycostofcapitalonaninvestmentinelectricalgeneration,giventheuniqueriskoftheproject.10%24%Investmentsinharddrivesorautoretailingshouldhavehigherdiscountrates.TheCostofCapitalwithDebtTheWeightedAverageCostofCapitalisgivenby:Itisbecauseinterestexpenseistax-deductiblethatwemultiplythelasttermby(1-TC)12.5EstimatingInternationalPaper’sCostofCapitalFirst,weestimatethecostofequityandthecostofdebt.Weestimateanequitybetatoestimatethecostofequity.WecanoftenestimatethecostofdebtbyobservingtheYTMofthefirm’sdebt.Second,wedeterminetheWACCbyweightingthesetwocostsappropriately.12.5EstimatingIP’sCostofCapitalTheindustryaveragebetais0.82;theriskfreerateis8%andthemarketriskpremiumis9.2%.Thusthecostofequitycapitalis12.5EstimatingIP’sCostofCapitalTheyieldonthecompany’sdebtis8%andthefirmisinthe37%marginaltaxrate.Thedebttovalueratiois32%12.18percentisInternational’scostofcapital.Itshouldbeusedtodiscountanyprojectwhereonebelievesthattheproject’sriskisequaltotheriskofthefirmasawhole,andtheprojecthasthesameleverageasthefirmasawhole.12.6ReducingtheCostofCapitalWhatisLiquidity?Liquidity,ExpectedReturnsandtheCostofCapitalLiquidityandAdverseSelectionWhattheCorporationCanDoWhatisLiquidity?Theideathattheexpectedreturnonastockandthefirm’scostofcapitalarepositivelyrelatedtoriskisfundamental.Recentlyanumberofacademicshavearguedthattheexpectedreturnonastockandthefirm’scostofcapitalarenegativelyrelatedtotheliquidityofthefirm’ssharesaswell.Thetradingcostsofholdingafirm’ssharesincludebrokeragefees,thebid-askspreadandmarketimpactcosts.Liquidity,ExpectedReturnsandtheCostofCapitalThecostoftradinganilliquidstockreducesthetotalreturnthataninvestorreceives.Investorsthuswilldemandahighexpectedreturnwheninvestinginstockswithhightradingcosts.Thishighexpectedreturnimpliesahighcostofcapitaltothefirm.LiquidityandtheCostofCapitalCostofCapitalLiquidityAnincreaseinliquidity,i.e.areductionintradingcosts,lowersafirm’scostofcapital.LiquidityandAdverseSelectionThereareanumberoffactorsthatdeterminetheliquidityofastock.Oneofthesefactorsisadverseselection.Thisreferstothenotiont