CH10TheCostofCapital(财务管理,英文版).pptx
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CH10TheCostofCapital(财务管理,英文版).pptx
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,CHAPTER10TheCostofCapital,CostofcapitalcomponentsAccountingforflotationcostsWACCAdjustingcostofcapitalforriskEstimatingprojectrisk,Whattypesofcapitaldofirmsuse?
DebtPreferredstockCommonequity:
RetainedearningsNewcommonstock,StockholdersfocusonA-TCFs.Therefore,weshouldfocusonA-Tcapitalcosts,i.e.,useA-TcostsinWACC.Onlykdneedsadjustment.,Shouldwefocusonbefore-taxorafter-taxcapitalcosts?
Thecostofcapitalisusedprimarilytomakedecisionsthatinvolveraisingnewcapital.So,focusontodaysmarginalcosts(forWACC).,Shouldwefocusonhistorical(embedded)costsornew(marginal)costs?
A15-year,12%semiannualbondsellsfor$1,153.72.Whatskd?
60,60+1,000,60,0,1,2,30,i=?
30-1153.726010005.0%x2=kd=10%,N,I/YR,PV,FV,PMT,-1,153.72,.,INPUTS,OUTPUT,ComponentCostofDebt,Interestistaxdeductible,sokdAT=kdBT(1T)=10%(10.40)=6%.Usenominalrate.Flotationcostssmall.Ignore.,Whatsthecostofpreferredstock?
Pp=$111.10;10%Q;Par=$100.,Usethisformula:
PictureofPreferredStock,2.50,2.50,0,1,2,kp=?
-111.1,.,2.50,$111.10=.kPer=2.25%;kp(Nom)=2.25%(4)=9%.,DQkPer,$2.50kPer,$2.50$111.10,Note:
Preferreddividendsarenottaxdeductible,sonotaxadjustment.Justkp.Nominalkpisused.Ourcalculationignoresflotationcosts.,Ispreferredstockmoreorlessriskytoinvestorsthandebt?
Morerisky;companynotrequiredtopaypreferreddividend.However,firmstrytopaypreferreddividend.Otherwise,
(1)cannotpaycommondividend,
(2)difficulttoraiseadditionalfunds,(3)preferredstockholdersmaygaincontroloffirm.,Whyisyieldonpreferredlowerthankd?
Corporationsownmostpreferredstock,because70%ofpreferreddividendsarenontaxabletocorporations.Therefore,preferredoftenhasalowerB-TyieldthantheB-Tyieldondebt.TheA-Tyieldtoaninvestor,andtheA-Tcosttotheissuer,arehigheronpreferredthanondebt.Consistentwithhigherriskofpreferred.,Example:
kp=9%kd=10%T=40%,kp,AT=kpkp(10.7)(T),=9%9%(0.3)(0.4)=7.92%.,kd,AT=10%10%(0.4)=6.00%.,A-TRiskPremiumonPreferred=1.92%.,Whyisthereacostforretainedearnings?
Earningscanbereinvestedorpaidoutasdividends.Investorscouldbuyothersecurities,earnareturn.Thus,thereisanopportunitycostifearningsareretained.,Opportunitycost:
Thereturnstockholderscouldearnonalternativeinvestmentsofequalrisk.Theycouldbuysimilarstocksandearnks,orcompanycouldrepurchaseitsownstockandearnks.So,ksisthecostofretainedearnings.,Threewaystodeterminecostofcommonequity,ks:
1.CAPM:
ks=kRF+(kMkRF)b.2.DCF:
ks=D1/P0+g.3.Own-Bond-Yield-Plus-RiskPremium:
ks=kd+RP.,WhatsthecostofcommonequitybasedontheCAPM?
kRF=7%,RPM=6%,b=1.2.,ks=kRF+(kMkRF)b.,=7.0%+(6.0%)1.2=14.2%.,WhatstheDCFcostofcommonequity,ks?
Given:
D0=$4.19;P0=$50;g=5%.,D1P0,D0(1+g)P0,$4.19(1.05)$50,ks=+g=+g=+0.05=0.088+0.05=13.8%.,Supposethecompanyhasbeenearning15%onequity(ROE=15%)andretaining35%(dividendpayout=65%),andthissituationisexpectedtocontinue.Whatstheexpectedfutureg?
Retentiongrowthrate:
g=(1Payout)(ROE)=0.35(15%)=5.25%.Here(1Payout)=Fractionretained.Closetog=5%givenearlier.Thinkofbankaccountpaying10%withpayout=100%,payout=0%,andpayout=50%.Whatsg?
CouldDCFmethodologybeappliedifgisnotconstant?
YES,nonconstantgstocksareexpectedtohaveconstantgatsomepoint,generallyin5to10years.Butcalculationsgetcomplicated.,Findksusingtheown-bond-yield-plus-risk-premiummethod.(kd=10%,RP=4%.),ThisRPCAPMRP.Producesballparkestimateofks.Usefulcheck.,ks=kd+RP=10.0%+4.0%=14.0%,Whatsareasonablefinalestimateofks?
MethodEstimateCAPM14.2%DCF13.8%kd+RP14.0%Average14.0%,1.Whenacompanyissuesnewcommonstocktheyalsohavetopayflotationcoststotheunderwriter.2.Issuingnewcommonstockmaysendanegativesignaltothecapitalmarkets,whichmaydepressstockprice.,Whyisthecostofretainedearningscheaperthanthecostofissuingnewcommonstock?
Twoapproachesthatcanbeusedtoaccountforflotationcosts:
Includetheflotationcostsaspartoftheprojectsup-frontcost.Thisreducestheprojectsestimatedreturn.Adjustthecostofcapitaltoincludeflotationcosts.ThisismostcommonlydonebyincorporatingflotationcostsintheDCFmodel.,Newcommon,F=15%:
Commentsaboutflotationcosts:
Flotationcostsdependontheriskofthefirmandthetypeofcapitalbeingraised.Theflotationcostsarehighestforcommonequity.However,sincemostfirmsissueequityinfrequently,theper-projectcostisfairlysmall.WewillfrequentlyignoreflotationcostswhencalculatingtheWACC.,WhatsthefirmsWACC(ignoringflotationcosts)?
WACC=wdkd(1T)+wpkp+wcks=0.3(10%)(0.6)+0.1(9%)+0.6(14%)=1.8%+0.9%+8.4%=11.1%.,WhatfactorsinfluenceacompanyscompositeWACC?
Marketconditions.Thefirmscapitalstructureanddividendpolicy.Thefirmsinvestmentpolicy.FirmswithriskierprojectsgenerallyhaveahigherWACC.,WACCEstimatesforSomeLargeU.S.Corporations,Nov.1999,CompanyWACCIntel12.9%GeneralElectric11.9Motorola11.3Coca-Cola11.2WaltDisney10.0AT&T9.8Wal-Mart9.8Exxon8.8H.J.Heinz8.5BellSouth8.2,ShouldthecompanyusethecompositeWACCasthehurdlerateforeachofitsprojects?
NO!
ThecompositeWACCreflectstheriskofanaverageprojectundertakenbythefirm.Therefore,theWACConlyrepresentsthe“hurdlerate”foratypicalprojectwithaveragerisk.Differentprojectshavedifferentrisks.TheprojectsWACCshouldbeadjustedtoreflecttheprojectsrisk.,RiskandtheCostofCapital,DivisionalCostofCapital,Whatarethethreetypesofprojectrisk?
Stand-aloneriskCorporateriskMarketrisk,Howiseachtypeofriskused?
Marketriskistheoreticallybestinmostsituations.However,creditors,customers,suppliers,andemployeesaremoreaffectedbycorporaterisk.Therefore,corporateriskisalsorelevant.,SubjectiveadjustmentstothefirmscompositeWACC.Attempttoestimatewhatthecostofcapitalwouldbeiftheproject/divisionwereastand-alonefirm.Thisrequiresestimatingtheprojectsbeta.,Whatproceduresareusedtodeterminetherisk-adjustedcostofcapitalforaparticularprojectordivision?
MethodsforEstimatingaProjectsBeta,1.Pureplay.Findseveralpubliclytradedcompaniesexclusivelyinprojectsbusiness.Useaverageoftheirbetasasproxyforprojectsbeta.Hardtofindsuchcompanies.,2.Accountingbeta.RunregressionbetweenprojectsROAandS&PindexROA.Accountingbetasarecorrelated(0.50.6)withmarketbetas.ButnormallycantgetdataonnewprojectsROAsbeforethecapitalbudgetingdecisionhasbeenmade.,FindthedivisionsmarketriskandcostofcapitalbasedontheCAPM,giventheseinputs:
Targetdebtratio=40%.kd=12%.kRF=7%.Taxrate=40%.betaDivision=1.7.Marketriskpremium=6%.,Beta=1.7,sodivisionhasmoremarketriskthanaverage.Divisionsrequiredreturnonequity:
ks=kRF+(kMkRF)bDiv.=7%+(6%)1.7=17.2%.WACCDiv.=wdkd(1T)+wcks=0.4(12%)(0.6)+0.6(17.2%)=13.2%.,Howdoesthedivisionsmarketriskcomparewiththefirmsoverallmarketrisk?
DivisionWACC=13.2%versuscompanyWACC=11.1%.Indicatesthatthedivisionsmarketriskisgreaterthanfirmsaverageproject.“Typical”projectswithinthisdivisionwouldbeacceptediftheirreturnsareabove13.2%.,
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