財(cái)務(wù)管理第十四章課件

1、Chapter 14Cost of CapitalMcGraw-Hill/IrwinCopyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.Key Concepts and SkillsKnow how to determine a firms cost of equity capitalKnow how to determine a firms cost of debtKnow how to determine a firms overall cost of capitalKnow how to handle

2、 flotation costsUnderstand pitfalls of overall cost of capital and how to manage them14-2Chapter OutlineThe Cost of Capital: Some PreliminariesThe Cost of EquityThe Costs of Debt and Preferred StockThe Weighted Average Cost of CapitalDivisional and Project Costs of CapitalFlotation Costs and the Wei

3、ghted Average Cost of Capital14-3Why Cost of Capital Is ImportantWe know that the return earned on assets depends on the risk of those assetsThe return to an investor is the same as the cost to the companyOur cost of capital provides us with an indication of how the market views the risk of our asse

4、tsKnowing our cost of capital can also help us determine our required return for capital budgeting projects14-4Required ReturnThe required return is the same as the appropriate discount rate and is based on the risk of the cash flowsWe need to know the required return for an investment before we can

5、 compute the NPV and make a decision about whether or not to take the investmentWe need to earn at least the required return to compensate our investors for the financing they have provided14-5Cost of EquityThe cost of equity is the return required by equity investors given the risk of the cash flow

6、s from the firmBusiness riskFinancial riskThere are two major methods for determining the cost of equityDividend growth modelSML, or CAPM14-6The Dividend Growth Model ApproachStart with the dividend growth model formula and rearrange to solve for RE14-7Example: Dividend Growth ModelSuppose that your

7、 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?14-8Example: Estimating the Dividend Growth RateOne method for estimating th

8、e growth rate is to use the historical averageYearDividendPercent Change20081.23-20091.3020101.3620111.4320121.50(1.30 1.23) / 1.23 = 5.7%(1.36 1.30) / 1.30 = 4.6%(1.43 1.36) / 1.36 = 5.1%(1.50 1.43) / 1.43 = 4.9%Average = (5.7 + 4.6 + 5.1 + 4.9) / 4 = 5.1%14-9Advantages and Disadvantages of Dividen

9、d Growth ModelAdvantage easy to understand and useDisadvantagesOnly applicable to companies currently paying dividendsNot applicable if dividends arent growing at a reasonably constant rateExtremely sensitive to the estimated growth rate - an increase in g of 1% increases the cost of equity by 1%Doe

10、s not explicitly consider risk14-10The SML ApproachUse the following information to compute our cost of equityRisk-free rate, RfMarket risk premium, E(RM) RfSystematic risk of asset, 14-11Example - SMLSuppose your company has an equity beta of .58, and the current risk-free rate is 6.1%. If the expe

11、cted market risk premium is 8.6%, what is your cost of equity capital?RE = 6.1 + .58(8.6) = 11.1%Since we came up with similar numbers using both the dividend growth model and the SML approach, we should feel good about our estimate14-12Advantages and Disadvantages of SMLAdvantagesExplicitly adjusts

12、 for systematic riskApplicable to all companies, as long as we can estimate betaDisadvantagesHave to estimate the expected market risk premium, which does vary over timeHave to estimate beta, which also varies over timeWe are using the past to predict the future, which is not always reliable14-13Exa

13、mple Cost of EquitySuppose our company has a beta of 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 curren

14、tly selling for $15.65. What is our cost of equity?Using SML: RE = 6% + 1.5(9%) = 19.5%Using DGM: RE = 2(1.06) / 15.65 + .06 = 19.55%14-14Cost 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 estimat

15、ed by computing 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 rate14-15Example: Cost of DebtSuppose we have a bond issue currently outstanding that has 25 years left to

16、maturity. The coupon rate is 9%, and coupons are paid semiannually. The bond is currently selling for $908.72 per $1,000 bond. What is the cost of debt?N = 50; PMT = 45; FV = 1000; PV = -908.72; CPT I/Y = 5%; YTM = 5(2) = 10%14-16Cost of Preferred StockRemindersPreferred stock generally pays a const

17、ant dividend each periodDividends are expected to be paid every period foreverPreferred stock is a perpetuity, so we take the perpetuity formula, rearrange and solve for RPRP = D / P014-17Example: Cost of Preferred StockYour company has preferred stock that has an annual dividend of $3. If the curre

18、nt price is $25, what is the cost of preferred stock?RP = 3 / 25 = 12%14-18The Weighted Average Cost of CapitalWe can use the individual costs of capital that we have computed to get our “average” cost of capital for the firm.This “average” is the required return on the firms assets, based on the ma

19、rkets perception of the risk of those assetsThe weights are determined by how much of each type of financing is used14-19Capital Structure WeightsNotationE = market value of equity = # of outstanding shares times price per shareD = market value of debt = # of outstanding bonds times bond priceV = ma

20、rket value of the firm = D + EWeightswE = E/V = percent financed with equitywD = D/V = percent financed with debt14-20Example: Capital Structure WeightsSuppose you have a market value of equity equal to $500 million and a market value of debt equal to $475 million.What are the capital structure weig

21、hts?V = 500 million + 475 million = 975 millionwE = E/V = 500 / 975 = .5128 = 51.28%wD = D/V = 475 / 975 = .4872 = 48.72%14-21Taxes and the WACCWe are concerned with after-tax cash flows, so we also need to consider the effect of taxes on the various costs of capitalInterest expense reduces our tax

22、liabilityThis reduction in taxes reduces our cost of debtAfter-tax cost of debt = RD(1-TC)Dividends are not tax deductible, so there is no tax impact on the cost of equityWACC = wERE + wDRD(1-TC)14-22Extended Example: WACC - IEquity Information50 million shares$80 per shareBeta = 1.15Market risk pre

23、mium = 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%14-23Extended Example: WACC - IIWhat is the cost of equity?RE = 5 + 1.15(9) = 15.35%What is the cost of debt?N = 30; PV = -1

24、,100; PMT = 45; FV = 1,000; 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%14-24Extended 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

25、/V = 4 / 5.1 = .7843wD = D/V = 1.1 / 5.1 = .2157What is the WACC?WACC = .7843(15.35%) + .2157(4.712%) = 13.06%14-25Eastman Chemical IClick on the web surfer to go to Yahoo! Finance to get information on Eastman Chemical (EMN)Under Profile and Key Statistics, you can find the following information:#

26、of shares outstandingBook value per sharePrice per shareBetaUnder analysts estimates, you can find analysts estimates of earnings growth (use as a proxy for dividend growth)The Bonds section at Yahoo! Finance can provide the T-bill rateUse this information, along with the CAPM and DGM to estimate th

27、e cost of equity14-26Eastman Chemical IIGo to FINRA to get market information on Eastman Chemicals bond issuesEnter Eastman Ch to find the bond informationNote that you may not be able to find information on all bond issues due to the illiquidity of the bond marketGo to the SEC website to get book v

28、alue information from the firms most recent 10Q14-27Eastman Chemical IIIFind the weighted average cost of the debtUse market values if you were able to get the informationUse the book values if market information was not availableThey are often very closeCompute the WACCUse market value weights if a

29、vailable14-28Example: Work the Web14-29Table 14.1 Cost of Equity14-30Table 14.1 Cost of Debt14-31Table 14.1 WACC14-32Divisional and Project Costs of CapitalUsing the WACC as our discount rate is only appropriate for projects that have the same risk as the firms current operationsIf we are looking at

30、 a project that does NOT have the same risk as the firm, then we need to determine the appropriate discount rate for that projectDivisions also often require separatediscount rates14-33Example: Using WACC for All ProjectsWhat would happen if we use the WACC for all projects regardless of risk?Assume

31、 the WACC = 15%ProjectRequired ReturnIRRA20%17%B15%18%C10%12%14-34The Pure Play ApproachFind one or more companies that specialize in the product or service that we are consideringCompute the beta for each companyTake an averageUse that beta along with the CAPM to find the appropriate return for a p

32、roject of that riskOften difficult to find pure play companies14-35Subjective ApproachConsider the projects risk relative to the firm overallIf the project has more risk than the firm, use a discount rate greater than the WACCIf the project has less risk than the firm, use a discount rate less than

33、the WACCYou may still accept projects that you shouldnt and reject projects you should accept, but your error rate should be lower than not considering differential risk at all14-36Example: SubjectiveApproach Risk LevelDiscount RateVery Low RiskWACC 8%Low RiskWACC 3%Same Risk as FirmWACCHigh RiskWAC

34、C + 5%Very High RiskWACC + 10%14-37Flotation CostsThe required return depends on the risk, not how the money is raisedHowever, the cost of issuing new securities should not just be ignored eitherBasic ApproachCompute the weighted average flotation costUse the target weights because the firm will iss

35、ue securities in these percentages over the long term14-38Example: NPV and Flotation Costs Your company is considering a project that will cost $1 million. The project will generate after-tax cash flows of $250,000 per year for 7 years. The WACC is 15%, and the firms target D/E ratio is .6 The flota

36、tion cost for equity is 5%, and the flotation cost for debt is 3%. What is the NPV for the project after adjusting for flotation costs?fA = (.375)(3%) + (.625)(5%) = 4.25%PV of future cash flows = 1,040,105NPV = 1,040,105 - 1,000,000/(1-.0425) = -4,281The project would have a positive NPV of 40,105

37、without considering flotation costsOnce we consider the cost of issuing new securities, the NPV becomes negative14-39Quick QuizWhat are the two approaches for computing the cost of equity?How do you compute the cost of debt and the after-tax cost of debt?How do you compute the capital structure weig

38、hts required for the WACC?What is the WACC?What happens if we use the WACC for the discount rate for all projects?What are two methods that can be used to compute the appropriate discount rate when WACC isnt appropriate?How should we factor flotation costs into our analysis?14-40Ethics IssuesHow cou

39、ld a project manager adjust the cost of capital (i.e., appropriate discount rate) to increase the likelihood of having his/her project accepted? Is this ethical or financially sound? 14-41Comprehensive ProblemA corporation has 10,000 bonds outstanding with a 6% annual coupon rate, 8 years to maturit

40、y, a $1,000 face value, and a $1,100 market price.The companys 100,000 shares of preferred stock pay a $3 annual dividend, and sell for $30 per share.The companys 500,000 shares of common stock sell for $25 per share and have a beta of 1.5. The risk free rate is 4%, and the market return is 12%.Assuming a 40% tax rate, what is the companys WACC?14-42End of Chapter14-43加強(qiáng)做責(zé)任心，責(zé)任到人，責(zé)任到位才是長(zhǎng)久的發(fā)展。7月-227月-22Wednesday, July 20, 2022弄虛作假要不得，踏實(shí)肯干第一名。14:15:1814:15:18