第十七章 杠杆企业的估价与资本预算.ppt

1、Prospectus,Recall that there are three questions in corporate finance. The first regards what long-term investments the firm should make (the capital budgeting question). The second regards the use of debt (the capital structure question). This chapter is the nexus of these questions.,Chapter Outlin

2、e,17.1 Adjusted Present Value Approach 17.2 Flows to Equity Approach 17.3 Weighted Average Cost of Capital Method 17.4 A Comparison of the APV, FTE, and WACC Approaches 17.5 Capital Budgeting When the Discount Rate Must Be Estimated 17.6 APV Example 17.7 Beta and Leverage 17.8 Summary and Conclusion

3、s,17.1 Adjusted Present Value Approach,The value of a project to the firm can be thought of as the value of the project to an unlevered firm (NPV) plus the present value of the financing side effects (NPVF): There are four side effects of financing: The Tax Subsidy to Debt The Costs of Issuing New S

4、ecurities The Costs of Financial Distress Subsidies to Debt Financing,APV Example,Consider a project of the Pearson Company, the timing and size of the incremental after-tax cash flows for an all-equity firm are:,01 2 3 4,-$1,000$125 $250 $375 $500,The unlevered cost of equity is r0 = 10%:,The proje

5、ct would be rejected by an all-equity firm: NPV 0.,APV Example (continued),Now, imagine that the firm finances the project with $600 of debt at rB = 8%. Pearsons tax rate is 40%, so they have an interest tax shield worth TCBrB = .40$600.08 = $19.20 each year.,The net present value of the project und

6、er leverage is:,So, Pearson should accept the project with debt.,APV Example (continued),Note that there are two ways to calculate the NPV of the loan. Previously, we calculated the PV of the interest tax shields. Now, lets calculate the actual NPV of the loan:,Which is the same answer as before.,17

7、.2 Flows to Equity Approach,Discount the cash flow from the project to the equity holders of the levered firm at the cost of levered equity capital, rS. There are three steps in the FTE Approach: Step One: Calculate the levered cash flows Step Two: Calculate rS. Step Three: Valuation of the levered

8、cash flows at rS.,Step One: Levered Cash Flows for Pearson,Since the firm is using $600 of debt, the equity holders only have to come up with $400 of the initial $1,000. Thus, CF0 = -$400 Each period, the equity holders must pay interest expense. The after-tax cost of the interest is BrB(1-TC) = $60

9、0.08(1-.40) = $28.80,-$400,Step Two: Calculate rS for Pearson,To calculate the debt to equity ratio, B/S, start with the debt to value ratio. Note that the value of the project is,B = $600 when V = $1,007.09 so S = $407.09.,Step Three: Valuation for Pearson,Discount the cash flows to equity holders

10、at rS = 11.77%,01 2 3 4,-$400 $96.20 $221.20 $346.20 -$128.80,17.3 WACC Method for Pearson,To find the value of the project, discount the unlevered cash flows at the weighted average cost of capital. Suppose Pearson Inc. target debt to equity ratio is 1.50,Valuation for Pearson using WACC,To find th

11、e value of the project, discount the unlevered cash flows at the weighted average cost of capital,17.4 A Comparison of the APV, FTE, and WACC Approaches,All three approaches attempt the same task:valuation in the presence of debt financing. Guidelines: Use WACC or FTE if the firms target debt-to-val

12、ue ratio applies to the project over the life of the project. Use the APV if the projects level of debt is known over the life of the project. In the real world, the WACC is the most widely used by far.,Summary: APV, FTE, and WACC,APVWACCFTE Initial Investment AllAllEquity Portion Cash FlowsUCFUCFLC

13、F Discount Rates r0 rWACCrS PV of financing effectsYesNoNo Which approach is best? Use APV when the level of debt is constant Use WACC and FTE when the debt ratio is constant,17.5 Capital Budgeting When the Discount Rate Must Be Estimated,A scale-enhancing project is one where the project is similar

14、 to those of the existing firm. In the real world, executives would make the assumption that the business risk of the non-scale-enhancing project would be about equal to the business risk of firms already in the business. No exact formula exists for this. Some executives might select a discount rate

15、 slightly higher on the assumption that the new project is somewhat riskier since it is a new entrant.,17.6 APV Example:,Worldwide Trousers, Inc. is considering a $5 million expansion of their existing business. The initial expense will be depreciated straight-line over 5 years to zero salvage value

16、; the pretax salvage value in year 5 will be $500,000. The project will generate pretax earnings of $1,500,000 per year, and not change the risk 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, th

17、e 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 net working capital. Calculate the APV.,17.6 APV Example: Cost,The cost of the project is not $5,000,000. We must include the round trip in and out of net wo

18、rking capital and the after-tax salvage value.,Lets 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.,17.6 APV Example: PV unlevered project,The PV unlevered project is