风险、成本与资本预算分析(共49页)（英文版）.ppt

1、CHAPTER12Risk, Cost of Capital, and Capital BudgetingSlide 2Key Concepts and Skills Know how to determine a firms cost of equity capital Understand the impact of beta in determining the firms cost of equity capital Know how to determine the firms overall cost of capital Understand how the liquidity

2、of a firms stock affects its cost of capitalSlide 3Chapter Outline12.1 The Cost of Equity Capital12.2 Estimation of Beta12.3 Determinants of Beta12.4 Extensions of the Basic Model12.5 Estimating Eastman Chemicals Cost of Capital12.6 Reducing the Cost of CapitalSlide 4Where Do We Stand? Earlier chapt

3、ers on capital budgeting focused on the appropriate size and timing of cash flows. This chapter discusses the appropriate discount rate when cash flows are risky.Slide 5Invest in project12.1 The Cost of Equity CapitalFirm withexcess cashShareholders Terminal ValuePay cash dividendShareholder invests

4、 in financial assetBecause stockholders can reinvest the dividend in risky financial assets, the expected return on a capital-budgeting project should be at least as great as the expected return on a financial asset of comparable risk.A firm with excess cash can either pay a dividend or make a capit

5、al investmentSlide 6The Cost of Equity Capital From the firms perspective, the expected return is the Cost of Equity Capital:)(FMiFiRRRR To estimate a firms cost of equity capital, we need to know three things:The risk-free rate, RFFMRRThe market risk premium,2,)(),(MMiMMiiRVarRRCovThe company beta,

6、Slide 7Example Suppose the stock of Stansfield Enterprises, a publisher of PowerPoint presentations, has a beta of 2.5. The firm is 100% equity financed. Assume a risk-free rate of 5% and a market risk premium of 10%. What is the appropriate discount rate for an expansion of this firm?)(FMiFRRRR%105

7、 . 2%5R%30RSlide 8Example Suppose Stansfield Enterprises is evaluating the following independent projects. Each costs $100 and lasts one year.ProjectProject bProjects Estimated Cash Flows Next YearIRRNPV at 30%A2.5$15050%$15.38B2.5$13030%$0C2.5$11010%-$15.38Slide 9Using the SML An all-equity firm sh

8、ould accept projects whose IRRs exceed the cost of equity capital and reject projects whose IRRs fall short of the cost of capital.Project IRRFirms risk (beta)SML5%Good projectBad project30%2.5ABCSlide 1012.2 Estimation of BetaMarket Portfolio - Portfolio of all assets in the economy. In practice, a

9、 broad stock market index, such as the S&P Composite, is used to represent the market.Beta - Sensitivity of a stocks return to the return on the market portfolio.Slide 11Estimation of Beta22)(),(MiMMiRVarRRCovProblemsBetas may vary over time.The sample size may be inadequate.Betas are influenced

10、 by changing financial leverage and business risk.SolutionsProblems 1 and 2 can be moderated by more sophisticated statistical techniques.Problem 3 can be lessened by adjusting for changes in business and financial risk.Look at average beta estimates of comparable firms in the industry.Slide 12Stabi

11、lity of Beta Most analysts argue that betas are generally stable for firms remaining in the same industry. That is not to say that a firms beta cannot change. Changes in product line Changes in technology Deregulation Changes in financial leverageSlide 13Using an Industry Beta It is frequently argue

12、d that one can better estimate a firms beta by involving the whole industry. If you believe that the operations of the firm are similar to the operations of the rest of the industry, you should use the industry beta. If you believe that the operations of the firm are fundamentally different from the

13、 operations of the rest of the industry, you should use the firms beta. Do not forget about adjustments for financial leverage.Slide 1412.3 Determinants of Beta Business RiskCyclicality of RevenuesOperating Leverage Financial RiskFinancial LeverageSlide 15Cyclicality of Revenues Highly cyclical stoc

14、ks have higher betas. Empirical evidence suggests that retailers and automotive firms fluctuate with the business cycle. Transportation firms and utilities are less dependent upon the business cycle. Note that cyclicality is not the same as variabilitystocks with high standard deviations need not ha

15、ve high betas. Movie studios have revenues that are variable, depending upon whether they produce “hits” or “flops,” but their revenues may not be especially dependent upon the business cycle.Slide 16Operating Leverage The degree of operating leverage measures how sensitive a firm (or project) is to

16、 its fixed costs. Operating leverage increases as fixed costs rise and variable costs fall. Operating leverage magnifies the effect of cyclicality on beta. The degree of operating leverage is given by:DOL = EBITD SalesSalesD EBITSlide 17Operating LeverageSales$Fixed costsTotal costsD EBITD SalesOper

17、ating leverage increases as fixed costs rise and variable costs fall.Fixed costsTotal costsSlide 18Financial Leverage and Beta Operating leverage refers to the sensitivity to the firms fixed costs of production. Financial leverage is the sensitivity to a firms fixed costs of financing. The relations

18、hip between the betas of the firms debt, equity, and assets is given by: Financial leverage always increases the equity beta relative to the asset beta.bAsset = Debt + EquityDebt bDebt + Debt + EquityEquity bEquitySlide 19ExampleConsider Grand Sport, Inc., which is currently all-equity financed and

19、has a beta of 0.90.The firm has decided to lever up to a capital structure of 1 part debt to 1 part equity.Since the firm will remain in the same industry, its asset beta should remain 0.90.However, assuming a zero beta for its debt, its equity beta would become twice as large:bAsset = 0.90 = 1 + 11

20、 bEquitybEquity = 2 0.90 = 1.80Slide 2012.4 Extensions of the Basic Model The Firm versus the Project The Cost of Capital with DebtSlide 21The Firm versus the Project Any projects cost of capital depends on the use to which the capital is being putnot the source. Therefore, it depends on the risk of

21、 the project and not the risk of the company. Slide 22Capital Budgeting & Project RiskA firm that uses one discount rate for all projects may over time increase the risk of the firm while decreasing its value.Project IRRFirms risk (beta)SMLrfbFIRMIncorrectly rejected positive NPV projectsIncorre

22、ctly accepted negative NPV projectsHurdle rate)(FMFIRMFRRRThe SML can tell us why:Slide 23Suppose the Conglomerate Company has a cost of capital, based on the CAPM, of 17%. The risk-free rate is 4%, the market risk premium is 10%, and the firms beta is 1.3.17% = 4% + 1.3 10% This is a breakdown of t

23、he companys investment projects:1/3 Automotive Retailer b = 2.01/3 Computer Hard Drive Manufacturer b = 1.31/3 Electric Utility b = 0.6average b of assets = 1.3When evaluating a new electrical generation investment, which cost of capital should be used?Capital Budgeting & Project RiskSlide 24Cap

24、ital Budgeting & Project RiskProject IRRProjects risk (b)17%1.32.00.6r = 4% + 0.6(14% 4% ) = 10% 10% reflects the opportunity cost of capital on an investment in electrical generation, given the unique risk of the project.10%24%Investments in hard drives or auto retailing should have higher disc

25、ount rates.SMLSlide 25The Cost of Capital with Debt The Weighted Average Cost of Capital is given by: Because interest expense is tax-deductible, we multiply the last term by (1 TC).rWACC = Equity + Debt Equity rEquity + Equity + Debt Debt rDebt (1 TC)rWACC = S + BS rS + S + BB rB (1 TC)Slide 26Exam

26、ple: International Paper First, we estimate the cost of equity and the cost of debt.We estimate an equity beta to estimate the cost of equity.We can often estimate the cost of debt by observing the YTM of the firms debt. Second, we determine the WACC by weighting these two costs appropriately.Slide

27、27Example: International Paper The industry average beta is 0.82, the risk free rate is 3%, and the market risk premium is 8.4%. Thus, the cost of equity capital is: rS = RF + bi ( RM RF)= 3% + .828.4%= 9.89%Slide 28Example: International Paper The yield on the companys debt is 8%, and the firm has

28、a 37% marginal tax rate. The debt to value ratio is 32%8.34% is Internationals cost of capital. It should be used to discount any project where one believes that the projects risk is equal to the risk of the firm as a whole and the project has the same leverage as the firm as a whole.= 0.68 9.89% +

29、0.32 8% (1 0.37) = 8.34%rWACC = S + BS rS + S + BB rB (1 TC)Slide 2912.6 Reducing the Cost of Capital What is Liquidity? Liquidity, Expected Returns and the Cost of Capital Liquidity and Adverse Selection What the Corporation Can DoSlide 30What is Liquidity? The idea that the expected return on a st

30、ock and the firms cost of capital are positively related to risk is fundamental. Recently, a number of academics have argued that the expected return on a stock and the firms cost of capital are negatively related to the liquidity of the firms shares as well. The trading costs of holding a firms sha

31、res include brokerage fees, the bid-ask spread and market impact costs.Slide 31Liquidity, Expected Returns and the Cost of Capital The cost of trading an illiquid stock reduces the total return that an investor receives. Investors will thus demand a high expected return when investing in stocks with

32、 high trading costs. This high expected return implies a high cost of capital to the firm.Slide 32Liquidity and the Cost of CapitalCost of CapitalLiquidityAn increase in liquidity (i.e., a reduction in trading costs) lowers a firms cost of capital.Slide 33Liquidity and Adverse Selection There are a

33、number of factors that determine the liquidity of a stock. One of these factors is adverse selection. This refers to the notion that traders with better information can take advantage of specialists and other traders who have less information. The greater the heterogeneity of information, the wider

34、the bid-ask spreads, and the higher the required return on equity.Slide 34What the Corporation Can Do The corporation has an incentive to lower trading costs since this would result in a lower cost of capital. A stock split would increase the liquidity of the shares. A stock split would also reduce

35、the adverse selection costs, thereby lowering bid-ask spreads. This idea is a new one, and empirical evidence is not yet available.Slide 35What the Corporation Can Do Companies can also facilitate stock purchases through the Internet. Direct stock purchase plans and dividend reinvestment plans handl

36、ed on-line allow small investors the opportunity to buy securities cheaply. Companies can also disclose more information, especially to security analysts to narrow the gap between informed and uninformed traders. This should reduce spreads.Slide 36Quick Quiz How do we determine the cost of equity ca

37、pital? How can we estimate a firm or project beta? How does leverage affect beta? How do we determine the cost of capital with debt? How does the liquidity of a firms stock affect the cost of capital?Slide 37 1. With the information given, we can find the cost of equity using the CAPM. The cost of e

38、quity is: RE = .045 + 1.30 (.13 .045) = .1555 or 15.55%Slide 38 3. a. The pretax cost of debt is the YTM of the companys bonds, so: P0= $1,080 = $50(PVIFAR%,46) + $1,000(PVIFR%,46) R = 4.58% YTM = 2 4.58% = 9.16% b. The aftertax cost of debt is: RD= .0916(1 .35) = .0595 or 5.95% c. The aftertax rate

39、 is more relevant because that is the actual cost to the company.Slide 39 5. Using the equation to calculate the WACC, we find: WACC = .55(.16) + .45(.09)(1 .35) = .1143 or 11.43%Slide 40 8. a. The book value of equity is the book value per share times the number of shares, and the book value of deb

40、t is the face value of the companys debt, so: BVE = 9.5M($5) = $47.5M BVD = $75M + 60M = $135M So, the total value of the company is: V = $47.5M + 135M = $182.5M And the book value weights of equity and debt are: E / V = $47.5/$182.5 = .2603 D / V = 1 E/V = .7397Slide 41 b. The market value of equit

41、y is the share price times the number of shares, so: MVE = 9.5M($53) = $503.5M Using the relationship that the total market value of debt is the price quote times the par value of the bond, we find the market value of debt is: MVD = .93($75M) + .965($60M) = $127.65M This makes the total market value

42、 of the company: V = $503.5M + 127.65M = $631.15M And the market value weights of equity and debt are: E/V = $503.5/$631.15 = .7978 D/V = 1 E/V = .2022 c. The market value weights are more relevant.Slide 42 11. We will begin by finding the market value of each type of financing. We find: MVD = 4,000

43、($1,000)(1.03) = $4,120,000 MVE = 90,000($57) = $5,130,000 And the total market value of the firm is: V = $4,120,000 + 5,130,000 = $9,250,000Slide 43 Now, we can find the cost of equity using the CAPM. The cost of equity is: RE = .06 + 1.10(.08) = .1480 or 14.80% The cost of debt is the YTM of the b

44、onds, so: P0 = $1,030 = $35(PVIFAR%,40) + $1,000(PVIFR%,40) R = 3.36% YTM = 3.36% 2 = 6.72% And the aftertax cost of debt is: RD = (1 .35)(.0672) = .0437 or 4.37% Now we have all of the components to calculate the WACC. The WACC is: WACC = .0437(4.12/9.25) + .1480(5.13/9.25) = .1015 or 10.15%Slide 4

45、4 13. a. Projects X, Y and Z. b. Using the CAPM to consider the projects, we need to calculate the expected return of each project given its level of risk. This expected return should then be compared to the expected return of the project. If the return calculated using the CAPM is higher than the project expected return, we should accept the project; if not, we reject the project. After considering risk via the CAPM: EW = .05 + .60(.12 .05) = .0920 .11, so accept W E