Risk-and-Capital-Budgeti课件

1、Risk and Capital Budgeting13Chapter OutlineConcept of risk based on uncertaintiesInvestors and their averseness to riskInvestors expected higher rate of return on risky projectsSimulation models and decision treesConsequences of risky projects both individually and for the firm as a whole2Definition

2、 of Risk in Capital BudgetingRisk is defined in terms of variability of possible outcomes from a given investmentRisk is measured not only in terms of losses but also in terms of uncertainty3Variability and Risk4The Concept of Risk-AverseBased on the assumption that most investors and managers are r

3、isk-aversePreference: relative certainty as opposed to uncertaintyExpectation: higher value or return for risky investments5Actual Measurement of RiskBasic statistical devices usedExpected value: D = DPStandard deviation: = (D D)2 PCo-efficient of Variation: (V) = D6Profitability Distribution with D

4、iffering Degrees of Risk7Profitability Distribution with Differing Degrees of Risk (contd)8Risk measure beta ()Beta is a risk measure widely used with portfolios of common stockBeta measures the volatility of returns on an individual stock relative to the stock market index of returns9Betas for Five

5、-Year Period (Ending January 2006)10Risk and the Capital Budgeting ProcessInformed investors and managers need to decide between:Investments that produce certain returnsInvestments that produce an expected value of return, apart from having a high coefficient of variation11Risk-Adjusted Discount Rat

6、eUsing different discount rates for proposals with different risk levelsInvestment with normal amount of risk may be discounted at the cost of capitalInvestments carrying greater than normal risk will be discounted at a higher rate and so onRisk is assumed to be measured by the coefficient of variat

7、ion (V)12Relationship of Risk to Discount Rate13Increasing Risk over TimeAccurate forecasting becomes more obscure farther out in timeUnexpected events:Create a higher standard deviation in cash flowsIncrease risk associated with long-lived projectsUsing progressively higher discount rates to compen

8、sate for risk tends to penalize late flows more than early flows14Qualitative MeasuresSetting up of risk classes based on qualitative considerations15Risk Categories and Associated Discount Rates16Example: Risk-adjusted Discount RateAssumption (Table 13-4):An investment calls for an addition to norm

9、al product line and is assigned discount rate of 10%Another investment represents a new product in foreign market and must carry 20% discount rate to adjust for a large risk componentFirst investment is the only acceptable alternative17Capital Budgeting Analysis18Capital Budgeting Decision Adjusted

10、for Risk 19Simulation ModelsHelp in dealing with uncertainties involved in forecasting the outcome of capital budgeting projects or other decisionsComputers enable the simulation of various economic and financial outcomes, using a number of variablesA Monte Carlo simulation model uses random variabl

11、e for inputs20Simulation Models (contd)Rely on repetition of the same random process as many as several hundred timesHave the ability to test various combinations of eventsAre used to test possible changes in variable conditions included in the processAre driven by sales forecasts, with assumptions

12、to derive income statements and balance sheetsGenerate probability acceptance curves for capital budgeting decisions21Simulation Flow Chart22Decision TreesHelp lay out a sequence of decisions that can be madePresent a tabular or graphical comparison between investment choicesProvide an important ana

13、lytical process23Decision Trees (contd)Assuming that a firm is considering two choices:Expanding the production for sale to end usersEntering the highly competitive personal computer market using the firms technologyCost of both projects is $60 million, with different net present value (NPV) and ris

14、kProject A: high likelihood of positive rate of return and the long-run growth is a reasonable expectationProject B: stiff competition may result in loss of more money or higher profit if sales are high24Decision Trees (contd)25The Portfolio EffectConsiders the impact of a given investment on the ov

15、erall risk of the firmA firm may plan to invest in the building products industry carrying a high degree of riskThe overall risk exposure of that firm might diminishThe investing firm could alter cyclical fluctuations inherent in its business and reduce overall risk exposureThus, standard deviation

16、for the entire company has been reduced26Portfolio RiskChanges in overall risk of a firm depends on its relationship with other investmentsHighly correlated investments - do not really diversify away riskNegatively correlated investments provide a high degree of risk reductionUncorrelated investment

17、s provide some overall reduction in portfolio risk27Coefficient of CorrelationRepresents extent of correlation among projectsA measure that may take on values anywhere from -1 to +1More likely measure case is a measure between -.2 negative correlation and +.3 positive correlationRisk can be reduced

18、by:Combining risky assets with low or negatively correlated assets28Rates of Return for Conglomerate, Inc., and Two Merger Candidates29Evaluation of CombinationsChoosing between the variable points or combinations should meet two primary objectives:Achieve the highest possible return at a given risk

19、 levelProvide the lowest possible risk at a given return levelAfter developing the best risk-return line - efficient frontier:Determine the position of the firm on that line30Risk-Return Trade-Offs31The Share Price EffectWhen a firm takes unnecessary or undesirable risk:Higher discount rate and a lo

20、wer valuation may be assigned to the stock in the marketHigher profits, resulting from risky ventures, could, however, have an opposite resultThe overall valuation of a firm might decrease with an increase in coefficient of variation, or beta32Capital Markets14Chapter OutlineCapital market and secur

21、itiesFund raisers in the capital marketsThe three-sector economy of the United StatesPhysical and electronic marketsRapid adjustment of prices as an indication of efficiencySecurity legislation34Security MarketsConsist of various government bonds and corporate common stockThe markets are influenced

22、by variables like:Interest ratesInvestor confidenceEconomic growthGlobal crises, etc.35Types of Security MarketsMoney marketsShort-term markets comprising of securities with maturities of one year or lessTreasury bills, commercial paper, negotiable certificates of depositsCapital marketsLong-term ma

23、rkets consisting of securities having maturities greater than one yearBonds, common stock, preferred stock, convertible securitiesThese securities comprise a firms capital structure36International Capital MarketsHave played an important role over the last decade due to various factors:The Soviet Uni

24、on disbanded in 1991China has moved along a capitalistic course for several decadesCentral and Eastern European countries “privatized” many of their state industries during the 1990sContinuing development of international “free trade”37International Capital Markets (contd)Establishment of NAFTA in 1

25、994CAFTA reduces trade barriersThe six original members of EU abolished internal tariffs in 1968WTO strives to further liberalize international tradeEuro still considered second most important international currencyValue of “euro cash” in circulation now exceeds value of dollars in circulation world

26、wide382006 Total Dollar Trading Volume on Ten Largest Equity Markets39International Capital Markets as a Source of FundsAn opportunity for companies to raise debt capital at the lowest costMany list their common stock around the world to:Increase liquidity for the stockholdersProvide opportunities f

27、or the potential sale of new stock in foreign countriesAbout 3.7% of foreign investment has been invested in government securities40Competition for Funds in the U.S. Capital MarketsSecurities available in the capital market:The federal governmentGovernment agenciesState governmentsLocal municipaliti

28、esInvestors must choose among corporate and noncorporate securities with the desire to:Maximize returns for any given level of risk41Government SecuritiesU.S. government securities - TreasuryManages the federal governments debt in order to balance the flow of fundsSells short- or long-term securitie

29、s to finance shortfalls or retires in case of surplusFederally sponsored credit agenciesGovernmental units issuing securities on a separate basis from those sold by U.S. TreasuryIncludes:Federal Home Loan Banks (FHLB)42Government Securities (contd)Federal National Mortgage Association (Fannie Mae)Fa

30、rm Credit BanksStudent Loan Marketing AssociationState and local securitiesMunicipal securities or tax-exempt offeringsInvestors - high marginal tax bracketsSupported by revenue-generating projects43Corporate SecuritiesCorporate bondsDebt instruments having a fixed life and to be repaid at maturityA

31、s bonds come due and are paid off, the corporation normally replaces this debt with new bondsPreferred stockLeast used of all long-term securities since the dividend is not tax-deductible to the corporation44Corporate Securities (contd)Common stockSold by companies desiring new equity capitalEither

32、sold as a new issue in an initial public offering (IPO) or as a secondary offeringTreasury stock: When a company purchases its own stock availability of surplus cash45Internal versus External Sources of FundsInternally generated funds include retained earnings and cash flow added back from depreciat

33、ionComposition of internal funds is a function of:Corporate profitabilityThe dividends paidThe resultant retained earningsThe depreciation tax shield firms avail46Internally Generated Funds: Depreciation and Retained Earnings47The Supply of Capital FundsHousehold sector - major supplier of fundsIndi

34、rect investments:Household savings generated by wagesTransfer payments from the governmentWages and dividends from the corporationsThese are funneled to financial intermediariesDiverse financial institutions channel funds into commercial banks, mutual savings banks, and credit unions48Flow of Funds

35、Through the Economy49Suppliers of Funds to Credit Markets (September 2007)50The Role of the Security MarketsThe capital markets are divided into many functional subsetsEach specific market serves a certain type of securitySecondary trading:The security trades in appropriate markets not original offe

36、ringProvides liquidity to investors and keeps the prices competitive51The Role of the Security Markets (contd)Security markets provide liquidity by:Enabling corporations to raise funds by selling new issues of securitiesAllowing investor to sell them with relative ease and speedCorporations and gove

37、rnment units would not be able to raise large amounts of capital for economic growth without markets52The Organization of the Security MarketsSecurity markets structuring has changed because of: Technological advances which include:The rise of electronic communication networks (ECNs)Mergers or allia

38、nces between exchangesTransformation of member exchanges into public companiesAcquisition of leading ECNs by the traditional exchanges53Traditional Organized ExchangesEither national or regional, both structured in similar fashionHistorically, exchanges have central trading location, securities boug

39、ht & sold in auction market by brokers acting as agents for buyers & sellersEach stock trades at a physical location, trading post, on exchanges trading floorBrokers are registered members of exchanges54Regional ExchangesBegan by trading securities of local firmsAlso listed on national exchanges but

40、 continued to be traded on regionalsTrade primarily done in nationally known companiesTrading in same companies common between NYSE and regionals like Chicago Stock Exchange dual trading More than 90 percent of companies traded on the Chicago Stock Exchange also listed on the NYSE - dual trading55Li

41、sting RequirementsA firms securities can be traded on an exchange if company meets listing requirements and has been approved by board of governors of that exchangeAll exchanges have minimum requirements that must be met before trading occurs in companys common stockNYSE - biggest exchange, generate

42、s most dollar volume in large companies, listing requirements are most restrictiveNASDAQ has less restrictive listing requirements than NYSE56Electronic Communication Networks (ECNs)Electronic trading systems that automatically buy and sell orders at specified pricesAlso known as alternative trading

43、 systems (ATSs)Have SEC approval to be fully integrated into the national market systemCan choose to act as broker-dealer or an exchangeLower the cost of tradingForced organized security exchanges to make significant changes in their operations and structure57The New York Stock ExchangeIn 2006, NYSE

44、 merged with a large ECN and became a public companyComprises of thousands of huge companies whose shares are listed on the NYSESpecialists meet to buy and sell securities through a bid and ask market, called an auction marketThey are registered members of the exchangeIn addition to acquiring Archip

45、elago, NYSE merged with EuronextNYSE acquired American Stock Exchange in 200858The NASDAQ MarketNASDAQ:Was once considered an OTC marketAll trades done electronicallySecond largest exchange in the U.S.Currently owns 30% of London Stock ExchangeKnown for trading technology and listing of many of the

46、worlds largest technology companies59The NASDAQ Market (contd)Created SuperMontage, electronic trading system that integrates trading process with limit orders, time stamps for receipt of orders, multiple quotes, etc.Acquired the largest ECN called INET, and later BRUTCreated more speed and price ef

47、ficiency in order executionsDivides its markets into national and small capitalization markets60World Federation of Exchanges Members (2006)61Market EfficiencyMarkets in general are efficient when:Prices adjust rapidly to new informationThere is a continuous market, in which each successive trade is

48、 made at a price closer to the previous priceThe market can absorb large dollar amounts of securities without destabilizing the pricesThe important variable affecting efficiency is the certainty of income stream62Market Efficiency (contd)Fixed income securities, with known maturities, have reasonabl

49、y efficient marketsThe most efficient is that for U.S. government securitiesCorporate bond markets are reasonable to a degreeCommon stocks market has been supported through decimalization, ECNs, etc.63The Efficient Market HypothesisWeak form Past price information is unrelated to future priceTrends

50、cannot be predicted and taken advantage of by investorsSemistrong formPrices currently reflect all public informationStrong formAll information, both private and public, is immediately reflected in stock prices64Regulation of the Security MarketsOrganized securities markets are regulated by the:Secu

51、rities and Exchange Commission (SEC)Self-regulation of the exchangesThree laws govern the sale and trading of securities with a primary purpose:To protect unwary investors from fraud and manipulationTo make markets more competitive and transparent65Securities Act of 1933Important features include:Al

52、l offerings except government bonds and bank stocks to be sold in more than one state to be registered with the SECThe registration statement is to be filled 20 days in advance of date of sale and must include detailed corporate informationThe SEC does not certify the fairness of a price, but only t

53、hat the information seems to be accurateAll new issues of securities must be accompanied by a prospectus containing the same information appearing in the registration statementOfficers of the company and other experts preparing the prospectus or the registration statement could be sued for penalties and recovery of realized losses in cas