财务管理课件chap013

1、mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwinleverage and capital structurechapter 13mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.1key concepts and skillsnunderstand the effect of financial leverage on cash flows an

2、d cost of equitynunderstand the impact of taxes and bankruptcy on capital structure choicenunderstand the basic components of the bankruptcy processmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.2chapter outlinenthe capital structure questionnthe effect of f

3、inancial leveragencapital structure and the cost of equity capitalncorporate taxes and capital structurenbankruptcy costsnoptimal capital structurenobserved capital structuresna quick look at the bankruptcy processmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin

4、13.3capital restructuringnwe are going to look at how changes in capital structure affect the value of the firm, all else equalncapital restructuring involves changing the amount of leverage a firm has without changing the firms assetsnincrease leverage by issuing debt and repurchasing outstanding s

5、haresndecrease leverage by issuing new shares and retiring outstanding debtmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.4choosing a capital structurenwhat is the primary goal of financial managers?nmaximize stockholder wealthnwe want to choose the capital

6、structure that will maximize stockholder wealthnwe can maximize stockholder wealth by maximizing firm value or minimizing waccmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.5the effect of leveragenhow does leverage affect the eps and roe of a firm?nwhen we i

7、ncrease the amount of debt financing, we increase the fixed interest expensenif we have a really good year, then we pay our fixed cost and we have more left over for our stockholdersnif we have a really bad year, we still have to pay our fixed costs and we have less left over for our stockholdersnle

8、verage amplifies the variation in both eps and roemcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.6example: financial leverage, eps and roenwe will ignore the effect of taxes at this stagenwhat happens to eps and roe when we issue debt and buy back shares of

9、stock?mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.7example: financial leverage, eps and roenvariability in roencurrent: roe ranges from 6.25% to 18.75%nproposed: roe ranges from 2.50% to 27.50%nvariability in epsncurrent: eps ranges from $1.25 to $3.75npr

10、oposed: eps ranges from $0.50 to $5.50nthe variability in both roe and eps increases when financial leverage is increasedmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.8break-even ebitnfind ebit where eps is the same under both the current and proposed capit

11、al structuresnif we expect ebit to be greater than the break-even point, then leverage is beneficial to our stockholdersnif we expect ebit to be less than the break-even point, then leverage is detrimental to our stockholdersmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw

12、-hill/irwin13.9example: break-even ebit$2.00400,000800,000eps$800,000ebit800,0002ebitebit400,000ebit200,000400,000ebit200,000400,000ebit400,000ebitmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.10example: homemade leverage and roencurrent capital structureni

13、nvestor borrows $2000 and uses $2000 of their own to buy 200 shares of stocknpayoffs:nrecession: 200(1.25) - .1(2000) = $50nexpected: 200(2.50) - .1(2000) = $300nexpansion: 200(3.75) - .1(2000) = $550nmirrors the payoffs from purchasing 100 shares from the firm under the proposed capital structurenp

14、roposed capital structureninvestor buys $1000 worth of stock (50 shares) and $1000 worth of trans am bonds paying 10%.npayoffs:nrecession: 50(.50) + .1(1000) = $125nexpected: 50(3.00) + .1(1000) = $250nexpansion: 50(5.50) + .1(1000) = $375nmirrors the payoffs from purchasing 100 shares under the cur

15、rent capital structuremcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.11capital structure theorynmodigliani and miller theory of capital structurenproposition i firm valuenproposition ii waccnthe value of the firm is determined by the cash flows to the firm a

16、nd the risk of the assetsnchanging firm valuenchange the risk of the cash flowsnchange the cash flowsmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.12capital structure theory under three special casesncase i assumptionsnno corporate or personal taxesnno bank

17、ruptcy costsncase ii assumptionsncorporate taxes, but no personal taxesnno bankruptcy costsncase iii assumptionsncorporate taxes, but no personal taxesnbankruptcy costsmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.13case i propositions i and iinproposition

18、inthe value of the firm is not affected by changes in the capital structurenthe cash flows of the firm do not change, therefore value doesnt changenproposition iinthe wacc of the firm is not affected by capital structuremcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill

19、/irwin13.14case i - equationsnwacc = ra = (e/v)re + (d/v)rdnre = ra + (ra rd)(d/e)nra is the “cost” of the firms business risk, i.e., the risk of the firms assetsn(ra rd)(d/e) is the “cost” of the firms financial risk, i.e., the additional return required by stockholders to compensate for the risk o

20、f leveragemcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.15case i - examplendatanrequired return on assets = 16%, cost of debt = 10%; percent of debt = 45%nwhat is the cost of equity?nre = .16 + (.16 - .10)(.45/.55) = .2091 = 20.91%nsuppose instead that the

21、cost of equity is 25%, what is the debt-to-equity ratio?n.25 = .16 + (.16 - .10)(d/e)nd/e = (.25 - .16) / (.16 - .10) = 1.5nbased on this information, what is the percent of equity in the firm?ne/v = 1 / 2.5 = 40%mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin1

22、3.16figure 13.3mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.17the capm, the sml and proposition iinhow does financial leverage affect systematic risk?ncapm: ra = rf + a(rm rf)nwhere a is the firms asset beta and measures the systematic risk of the firms as

23、setsnproposition iinreplace ra with the capm and assume that the debt is riskless (rd = rf)nre = rf + a(1+d/e)(rm rf)mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.18business risk and financial risknre = rf + a(1+d/e)(rm rf)ncapm: re = rf + e(rm rf)ne = a(1

24、+ d/e)ntherefore, the systematic risk of the stock depends on:nsystematic risk of the assets, a, (business risk)nlevel of leverage, d/e, (financial risk)mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.19case ii cash flowsninterest is tax deductiblentherefore,

25、 when a firm adds debt, it reduces taxes, all else equalnthe reduction in taxes increases the cash flow of the firmnhow should an increase in cash flows affect the value of the firm?mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.20case ii - exampleebitintere

26、sttaxable incometaxes (34%)net incomecffaunlevered firm500005000170033003300levered firm50005004500153029703470mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.21interest tax shieldnannual interest tax shieldntax rate times interest paymentn6250 in 8% debt = 5

27、00 in interest expensenannual tax shield = .34(500) = 170npresent value of annual interest tax shieldnassume perpetual debt for simplicitynpv = 170 / .08 = 2125npv = d(rd)(tc) / rd = dtc = 6250(.34) = 2125mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.22case

28、 ii proposition inthe value of the firm increases by the present value of the annual interest tax shieldnvalue of a levered firm = value of an unlevered firm + pv of interest tax shieldnvalue of equity = value of the firm value of debtnassuming perpetual cash flowsnvu = ebit(1-t) / runvl = vu + dtcm

29、cgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.23example: case ii proposition indatanebit = 25 million; tax rate = 35%; debt = $75 million; cost of debt = 9%; unlevered cost of capital = 12%nvu = 25(1-.35) / .12 = $135.42 millionnvl = 135.42 + 75(.35) = $161.

30、67 millionne = 161.67 75 = $86.67 millionmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.24figure 13.4mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.25case ii proposition iinthe wacc decreases as d/e increases because

31、 of the government subsidy on interest paymentsnra = (e/v)re + (d/v)(rd)(1-tc)nre = ru + (ru rd)(d/e)(1-tc)nexamplenre = .12 + (.12-.09)(75/86.67)(1-.35) = 13.69%nra = (86.67/161.67)(.1369) + (75/161.67)(.09)(1-.35)ra = 10.05%mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgra

32、w-hill/irwin13.26example: case ii proposition iinsuppose that the firm changes its capital structure so that the debt-to-equity ratio becomes 1.nwhat will happen to the cost of equity under the new capital structure?nre = .12 + (.12 - .09)(1)(1-.35) = 13.95%nwhat will happen to the weighted average

33、cost of capital?nra = .5(.1395) + .5(.09)(1-.35) = 9.9%mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.27illustration of proposition iimcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.28case iiinnow we add bankruptcy co

34、stsnas the d/e ratio increases, the probability of bankruptcy increasesnthis increased probability will increase the expected bankruptcy costsnat some point, the additional value of the interest tax shield will be offset by the expected bankruptcy costnat this point, the value of the firm will start

35、 to decrease and the wacc will start to increase as more debt is addedmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.29bankruptcy costsndirect costsnlegal and administrative costsnultimately cause bondholders to incur additional lossesndisincentive to debt f

36、inancingnfinancial distressnsignificant problems in meeting debt obligationsnmost firms that experience financial distress do not ultimately file for bankruptcymcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.30more bankruptcy costsnindirect bankruptcy costsnl

37、arger than direct costs, but more difficult to measure and estimatenstockholders wish to avoid a formal bankruptcy filingnbondholders want to keep existing assets intact so they can at least receive that moneynassets lose value as management spends time worrying about avoiding bankruptcy instead of

38、running the businessnalso have lost sales, interrupted operations and loss of valuable employeesmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.31figure 13.5mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.32conclusions

39、ncase i no taxes or bankruptcy costsnno optimal capital structurencase ii corporate taxes but no bankruptcy costsnoptimal capital structure is 100% debtneach additional dollar of debt increases the cash flow of the firmncase iii corporate taxes and bankruptcy costsnoptimal capital structure is part

40、debt and part equitynoccurs where the benefit from an additional dollar of debt is just offset by the increase in expected bankruptcy costsmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.33figure 13.6mcgraw-hill 2004 the mcgraw-hill companies, inc. all rights

41、 reserved.mcgraw-hill/irwin13.34additional managerial recommendationsnthe tax benefit is only important if the firm has a large tax liabilitynrisk of financial distressnthe greater the risk of financial distress, the less debt will be optimal for the firmnthe cost of financial distress varies across

42、 firms and industries and as a manager you need to understand the cost for your industrymcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin13.35observed capital structurencapital structure does differ by industriesndifferences according to cost of capital 2000 yearbook by ibbotson associates, inc.nlowest levels of debtndrugs with 2.75% debtncomputers with 6.91% debtnhighest levels of debtnsteel with 55.84% debtndepartment stores with 50.53% debtmcgraw-hill 2004 the mcgraw-hill companies, inc. all rights reserved.mcgraw-hil