财务管理基础 沈洪涛课件13

CHAPTER13

CapitalStructureandLeverageBusinessvs.financialriskOptimalcapitalstructureOperatingleverageCapitalstructuretheoryUncertaintyaboutfutureoperatingincome(EBIT),i.e.,howwellcanwepredictoperatingincome?

Notethatbusinessriskdoesnotincludefinancingeffects.Whatisbusinessrisk?ProbabilityEBITE(EBIT)0LowriskHighriskWhatdeterminesbusinessrisk?Uncertaintyaboutdemand(sales).Uncertaintyaboutoutputprices.Uncertaintyaboutcosts.Product,othertypesofliability.Operatingleverage.Whatisoperatingleverage,andhowdoesitaffectafirm’sbusinessrisk?Operatingleverageistheuseoffixedcostsratherthanvariablecosts.Ifmostcostsarefixed,hencedonotdeclinewhendemandfalls,thenthefirmhashighoperatingleverage.EffectofoperatingleverageMoreoperatingleverageleadstomorebusinessrisk,forthenasmallsalesdeclinecausesabigprofitdecline.Whathappensifvariablecostschange?Sales$Rev.TCFCQBESales$Rev.TCFCQBE}ProfitUsingoperatingleverageTypicalsituation:CanuseoperatingleveragetogethigherE(EBIT),butriskalsoincreases.ProbabilityEBITLLowoperatingleverageHighoperatingleverageEBITHWhatisfinancialleverage?

Financialrisk?Financialleverageistheuseofdebtandpreferredstock.Financialriskistheadditionalriskconcentratedoncommonstockholdersasaresultoffinancialleverage.Businessriskvs.FinancialriskBusinessriskdependsonbusinessfactorssuchascompetition,productliability,andoperatingleverage.Financialriskdependsonlyonthetypesofsecuritiesissued.Moredebt,morefinancialrisk.Concentratesbusinessriskonstockholders.Anexample:

IllustratingeffectsoffinancialleverageTwofirmswiththesameoperatingleverage,businessrisk,andprobabilitydistributionofEBIT.Onlydifferwithrespecttotheiruseofdebt(capitalstructure).

FirmU

FirmL Nodebt $10,000of12%debt $20,000inassets $20,000inassets 40%taxrate 40%taxrateFirmU:UnleveragedEconomy

BadAvg.GoodProb. 0.25 0.50 0.25EBIT $2,000 $3,000 $4,000Interest 0

0

0EBT $2,000 $3,000 $4,000Taxes(40%) 800

1,200

1,600NI $1,200 $1,800 $2,400FirmL:LeveragedEconomy

BadAvg.GoodProb.* 0.25 0.50 0.25EBIT* $2,000 $3,000 $4,000Interest 1,200

1,200

1,200EBT $800 $1,800 $2,800Taxes(40%) 320

720

1,120NI $480 $1,080 $1,680*SameasforFirmU.RatiocomparisonbetweenleveragedandunleveragedfirmsFIRMU Bad Avg GoodBEP 10.0%15.0%20.0%ROE 6.0%9.0%12.0%TIE ∞∞∞FIRML Bad Avg GoodBEP 10.0%15.0%20.0%ROE 4.8%10.8%16.8%TIE 1.67x2.50x3.30xRiskandreturnforleveragedandunleveragedfirmsExpectedValues:

FirmU

FirmL E(BEP) 15.0% 15.0% E(ROE) 9.0% 10.8% E(TIE) ∞ 2.5xRiskMeasures:

FirmU

FirmL

σROE 2.12% 4.24% CVROE 0.24 0.39TheeffectofleverageonprofitabilityanddebtcoverageForleveragetoraiseexpectedROE,musthaveBEP>kd.Why?Ifkd>BEP,thentheinterestexpensewillbehigherthantheoperatingincomeproducedbydebt-financedassets,soleveragewilldepressincome.Asdebtincreases,TIEdecreasesbecauseEBITisunaffectedbydebt,andinterestexpenseincreases(IntExp=kdD).ConclusionsBasicearningpower(BEP)isunaffectedbyfinancialleverage.LhashigherexpectedROEbecauseBEP>kd.LhasmuchwiderROE(andEPS)swingsbecauseoffixedinterestcharges.Itshigherexpectedreturnisaccompaniedbyhigherrisk.OptimalCapitalStructureThatcapitalstructure(mixofdebt,preferred,andcommonequity)atwhichP0ismaximized.TradesoffhigherE(ROE)andEPSagainsthigherrisk.Thetax-relatedbenefitsofleverageareexactlyoffsetbythedebt’srisk-relatedcosts.Thetargetcapitalstructureisthemixofdebt,preferredstock,andcommonequitywithwhichthefirmintendstoraisecapital.Describethesequenceofeventsinarecapitalization.CampusDeliannouncestherecapitalization.Newdebtisissued.Proceedsareusedtorepurchasestock.Thenumberofsharesrepurchasedisequaltotheamountofdebtissueddividedbypricepershare.Costofdebtatdifferentlevelsofdebt,aftertheproposedrecapitalizationAmountD/AD/EBondborrowedratioratioratingkd$0 0 0 -- --250 0.125 0.1429AA 8.0%500 0.250 0.3333A 9.0%750 0.375 0.6000BBB 11.5%1,000 0.500 1.0000BB 14.0%Whydothebondratingandcostofdebtdependupontheamountborrowed?Asthefirmborrowsmoremoney,thefirmincreasesitsfinancialriskcausingthefirm’sbondratingtodecrease,anditscostofdebttoincrease.Analyzetheproposedrecapitalizationatvariouslevelsofdebt.DeterminetheEPSandTIEateachlevelofdebt.DeterminingEPSandTIEatdifferentlevelsofdebt.

(D=$250,000andkd=8%)DeterminingEPSandTIEatdifferentlevelsofdebt.

(D=$500,000andkd=9%)DeterminingEPSandTIEatdifferentlevelsofdebt.

(D=$750,000andkd=11.5%)DeterminingEPSandTIEatdifferentlevelsofdebt.

(D=$1,000,000andkd=14%)StockPrice,withzerogrowthIfallearningsarepaidoutasdividends,E(g)=0.EPS=DPSTofindtheexpectedstockprice(P0),wemustfindtheappropriateksateachofthedebtlevelsdiscussed.Whateffectdoesincreasingdebthaveonthecostofequityforthefirm?Ifthelevelofdebtincreases,theriskinessofthefirmincreases.Wehavealreadyobservedtheincreaseinthecostofdebt.However,theriskinessofthefirm’sequityalsoincreases,resultinginahigherks.TheHamadaEquationBecausetheincreaseduseofdebtcausesboththecostsofdebtandequitytoincrease,weneedtoestimatethenewcostofequity.TheHamadaequationattemptstoquantifytheincreasedcostofequityduetofinancialleverage.Usestheunleveredbetaofafirm,whichrepresentsthebusinessriskofafirmasifithadnodebt.TheHamadaEquation

βL=βU[1+(1-T)(D/E)]Suppose,therisk-freerateis6%,asisthemarketriskpremium.Theunleveredbetaofthefirmis1.0.Wewerepreviouslytoldthattotalassetswere$2,000,000.CalculatingleveredbetasandcostsofequityIfD=$250,

βL=1.0[1+(0.6)($250/$1,750)]

βL=1.0857 ks=kRF+(kM–kRF)βL ks=6.0%+(6.0%)1.0857 ks=12.51%TableforcalculatingleveredbetasandcostsofequityAmountborrowed$02505007501,000D/Aratio0.00%12.5025.0037.5050.00LeveredBeta1.001.091.201.361.60D/Eratio0.00%14.2933.3360.00100.00ks12.00%12.5113.2014.1615.60FindingOptimalCapitalStructureThefirm’soptimalcapitalstructurecanbedeterminedtwoways:MinimizesWACC.Maximizesstockprice.Bothmethodsyieldthesameresults.TableforcalculatingWACCanddeterminingtheminimumWACCD/Aratio0.00%12.5025.0037.5050.00WACC12.00%11.5511.2511.4412.00E/Aratio100.00%87.5075.0062.5050.00ks12.00%12.5113.2014.1615.60kd(1–T)0.00%4.805.406.908.40Amountborrowed$02505007501,000*AmountborrowedexpressedintermsofthousandsofdollarsTablefordeterminingthestockpricemaximizingcapitalstructureAmountBorrowedDPSksP0$0$3.0012.00%$25.00250,0003.2612.51500,0003.5513.2026.0326.89750,0003.7714.1626.591,000,0003.9015.6025.00WhatdebtratiomaximizesEPS?MaximumEPS=$3.90atD=$1,000,000,andD/A=50%.(RememberDPS=EPSbecausepayout=100%.)RiskistoohighatD/A=50%.WhatisCampusDeli’soptimalcapitalstructure?P0ismaximized($26.89)atD/A=$500,000/$2,000,000=25%,sooptimalD/A=25%.EPSismaximizedat50%,butprimaryinterestisstockprice,notE(EPS).TheexampleshowsthatwecanpushupE(EPS)byusingmoredebt,buttheriskresultingfromincreasedleveragemorethanoffsetsthebenefitofhigherE(EPS).Whatifthereweremore/lessbusinessriskthanoriginallyestimated,howwouldtheanalysisbeaffected?Iftherewerehigherbusinessrisk,thentheprobabilityoffinancialdistresswouldbegreateratanydebtlevel,andtheoptimalcapitalstructurewouldbeonethathadlessdebt.Ontheotherhand,lowerbusinessriskwouldleadtoanoptimalcapitalstructurewithmoredebt.Otherfactorstoconsiderwhenestablishingthefirm’stargetcapitalstructureIndustryaveragedebtratioTIEratiosunderdifferentscenariosLender/ratingagencyattitudesReserveborrowingcapacityEffectsoffinancingoncontrolAssetstructureExpectedtaxrateHowwouldthesefactorsaffectthetargetcapitalstructure?Salesstability?Highoperatingleverage?Increaseinthecorporatetaxrate?Increaseinthepersonaltaxrate?Increaseinbankruptcycosts?Managementspendinglotsofmoneyonlavishperks?Modigliani-MillerIrrelevanceTheoryValueofStock0D1D2D/AMMresultActualNoleverageModigliani-MillerIrrelevanceTheoryThegraphshowsMM’staxbenefitvs.bankruptcycosttheory.Logical,butdoesn’tt