公司理财（英文版·第5版）课件 第18章　有杠杆时的资本预算与估值

CorporateFinanceFifthEditionChapter18CapitalBudgetingandValuationwithLeverageCopyright©2020,2017,2014PearsonEducation,Inc.

AllRightsReservedChapterOutline(1of2)18.1OverviewofKeyConcepts18.2TheWeightedAverageCostofCapitalMethod18.3

TheAdjustedPresentValueMethod18.4

TheFlow-to-EquityMethod18.5Project-BasedCostsofCapital18.6

APVwithOtherLeveragePoliciesChapterOutline(2of2)18.7

OtherEffectsofFinancing18.8

AdvancedTopicsinCapitalBudgetingLearningObjectives(1of4)Describethreemethodsofvaluationdiscussedinthechapter,andlistthestepsincomputingeach.Computetheunleveredandequitycostsofcapital,andexplainhowtheyarerelated.Estimatethecostofcapitalforaproject,evenifitsriskisdifferentfromthatofthefirmasawhole.LearningObjectives(2of4)Estimatethecostofcapitalforaproject,giventheproject’sdebt-to-valueratio,assuming(1)thefirmmaintainsatargetleverageratioor(2)sometaxshieldsarepredetermined.Discusstheimportanceofconsideringtheincrementalimpactoftheleverageofaprojectonthefirmoverall.Calculatetheleveredvalueofaprojectif(1)thefirmhasaconstantinterestcoveragepolicyor(2)thefirmkeepsdebtataconstantlevel.LearningObjectives(3of4)DescribesituationsinwhichtheW

A

C

CmethodisbesttouseandsituationsinwhichtheA

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Vmethodisadvisable.Discusshowissuancecostsandmispricingcostsshouldbeincludedintheassessmentoftheproject’svalue.Calculatethevalueoftheinteresttaxshieldifafirmadjustsitsdebtannuallytoatargetlevel.LearningObjectives(4of4)Describetheeffectsoffinancialdistressontheuseofleverage.AdjusttheA

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Vmethodforpersonaltaxes.18.1OverviewofKeyConceptsAssumptionsinthischapterTheprojecthasaveragerisk.Thefirm’sdebt-equityratioisconstant.Corporatetaxesaretheonlyimperfection.18.2TheWeightedAverageCostofCapitalMethod(1of2)Fornow,itisassumedthatthefirmmaintainsaconstantdebt-equityratioandthattheW

A

C

Cremainsconstantovertime18.2TheWeightedAverageCostofCapitalMethod(2of2)BecausetheW

A

C

Cincorporatesthetaxsavingsfromdebt,wecancomputetheleveredvalueofaninvestment,bydiscountingitsfuturefreecashflowusingtheW

A

C

CUsingtheWACCtoValueaProject

(1of4)AssumeAvcoisconsideringintroducinganewlineofpackaging,theR

F

XSeriesAvcoexpectsthetechnologyusedintheseproductstobecomeobsoleteafterfouryears.However,themarketinggroupexpectsannualsalesof$60millionperyearoverthenextfouryearsforthisproductline.Manufacturingcostsandoperatingexpensesareexpectedtobe$25millionand$9million,respectively,peryear.UsingtheWACCtoValueaProject

(2of4)DevelopingtheproductwillrequireupfrontR&Dandmarketingexpensesof$6.667million,togetherwitha$24millioninvestmentinequipment.Theequipmentwillbeobsoleteinfouryearsandwillbedepreciatedusingthestraight-linemethodoverthatperiod.Avcoexpectsnonetworkingcapitalrequirementsfortheproject.Avcopaysacorporatetaxrateof25%.Table18.1ExpectedFreeCashFlowfromAvco’sRFXProjectTable18.2Avco’sCurrentMarketValueBalanceSheet($million)andCostofCapitalwithouttheRFXProjectUsingtheWACCtoValueaProject(3of4)Avcointendstomaintainasimilar(net)debt-equityratiofortheforeseeablefuture,includinganyfinancingrelatedtotheR

F

Xproject.Thus,Avco’sW

A

C

CisNotethatnetUsingtheWACCtoValueaProject

(4of4)Thevalueoftheproject,includingthetaxshieldfromdebt,iscalculatedasthepresentvalueofitsfuturefreecashflowsTheN

P

Voftheprojectis$33.25million.SummaryoftheWACCMethod(1of2)Determinethefreecashflowoftheinvestment.Computetheweightedaveragecostofcapital.Computethevalueoftheinvestment,includingthetaxbenefitofleverage,bydiscountingthefreecashflowoftheinvestmentusingtheW

A

C.C.SummaryoftheWACCMethod(2of2)TheW

A

C

Ccanbeusedthroughoutthefirmasthecompanywidecostofcapitalfornewinvestmentsthatareofcomparablerisktotherestofthefirmandthatwillnotalterthefirm’sdebt-equityratio.TextbookExample18.1(1of2)ValuinganAcquisitionUsingtheW

A

C

CMethodProblemSupposeAvcoisconsideringtheacquisitionofanotherfirminitsindustrythatspecializesincustompackaging.TheacquisitionisexpectedtoincreaseAvco’sfreecashflowby$4.25millionthefirstyear,andthiscontributionisexpectedtogrowatarateof3%peryearfromthenon.Avcohasnegotiatedapurchasepriceof$80million.Afterthetransaction,Avcowilladjustitscapitalstructuretomaintainitscurrentdebt-equityratio.IftheacquisitionhassimilarrisktotherestofAcvo,whatisthevalueofthisdeal?TextbookExample18.1(2of2)SolutionThefreecashflowsoftheacquisitioncanbevaluedasagrowingperpetuity.BecauseitsriskmatchestheriskfortherestofAvco,andbecauseAvcowillmaintainthesamedebt-equityratiogoingforward,wecandiscountthesecashflowsusingtheW

A

C

Cof7.25%.Thus,thevalueoftheacquisitionisGiventhepurchasepriceof$80million,theacquisitionhasanN

P

Vof$20million.AlternativeExample18.1(1of4)ProblemAssumeChittendenisconsideringtheacquisitionofanotherfirminitsindustry.TheacquisitionisexpectedtoincreaseChittenden’sfreecashflowby$5millionthefirstyear,andthiscontributionisexpectedtogrowatarateof4%peryearfromthenon.Chittendenhasnegotiatedapurchasepriceof$110million.AlternativeExample18.1(2of4)ProblemAssumeChittenden’sweightedaveragecostofcapitalis7.5%.Afterthetransaction,Chittendenwilladjustitscapitalstructuretomaintainitscurrentdebt-equityratioof2.IftheacquisitionhassimilarrisktotherestofChittenden,whatisthevalueofthisdeal?AlternativeExample18.1(3of4)SolutionTheacquisitioncanbeviewedasagrowingperpetuity:NoteBecausetheacquisition’sriskmatchestheriskfortherestofChittenden,andbecauseChittendenwillmaintainthesamedebt-equityratiogoingforward,theW

A

C

Cwillremainat7.5%.AlternativeExample18.1(4of4)SolutionTheN

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Voftheacquisitionis

ImplementingaConstantDebt-EquityRatio(1of5)ByundertakingtheR

F

Xproject,Avcoaddsnewassetstothefirmwithinitialmarketvalue$70.73million.Therefore,tomaintainitsdebt-to-valueratio,Avco

mustaddmillioninnewdebt.ImplementingaConstantDebt-EquityRatio(2of5)Avcocanaddthisdebteitherbyreducingcashorbyborrowingandincreasingdebt.AssumeAvcodecidestospendits$20millionincashandborrowanadditional$15.365million.Becauseonly$29millionisrequiredtofundtheproject,Avcowillpaytheremainingtoshareholdersthroughadividend(orsharerepurchase).Table18.3Avco’sCurrentMarketValueBalanceSheet($million)withtheRFXProjectImplementingaConstantDebt-EquityRatio(3of5)ThemarketvalueofAvco’sequityincreasesby$33.625million.Addingthedividendof$6.365million,theshareholders’totalgainiswhichisexactlytheN

P

VwecalculatedfortheR

F

Xproject.ImplementingaConstantDebt-EquityRatio(4of5)DebtCapacityTheamountofdebtataparticulardatethatisrequiredtomaintainthefirm’stargetdebt-to-valueratioThedebtcapacityatdatetiscalculatedasWheredisthefirm’stargetdebt-to-valueratioandistheleveredcontinuationvalueondatetImplementingaConstantDebt-EquityRatio(5of5)DebtCapacity

iscalculatedasTable18.4ContinuationValueandDebtCapacityoftheRFXProjectoverTimeTextbookExample18.2(1of2)DebtCapacityforanAcquisitionProblemSupposeAvcoproceedswiththeacquisitiondescribedinExample18.1.HowmuchdebtmustAvcousetofinancetheacquisitionandstillmaintainitsdebt-to-valueratio?Howmuchoftheacquisitioncostmustbefinancedwithequity?TextbookExample18.2(2of2)SolutionFromthesolutiontoExample18.2,themarketvalueoftheassetsacquiredintheacquisition,is$100million.Thus,tomaintaina50%debt-to-valueratio,Avcomustincreaseitsdebtby$50million.Theremaining$30millionofthe$80millionacquisitioncostwillbefinancedwithnewequity.Inadditiontothe$30millioninnewequity,thevalueofAvco’sexistingshareswillincreasebythe$20millionN

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Voftheacquisition,sointotalthemarketvalueofAvco’sequitywillriseby$50million.AlternativeExample18.2(1of3)ProblemExpandingonthepreviousalternativeexample,assumeChittendenproceedswiththeacquisition:HowmuchdebtmustChittendenusetofinancetheacquisitionandstillmaintainitsdebt-to-valueratio?Howmuchoftheacquisitioncostmustbefinancedwithequity?AlternativeExample18.2(2of3)SolutionFromthepreviousexample,themarketvalueoftheassetsacquiredintheacquisitionis$142,857,143.Tomaintainitsdebt-to-equityratioof2,Chittendenmustincreaseitsdebtby$95,242,857.AlternativeExample18.2(3of3)SolutionTheremaining$14,757,143ofthe$110,000,000acquisitioncostwillbefinancedwithnewequity.Inadditiontothe$14,757,143innewequity,Chittenden’sexistingshareswillincreaseinvalueby$32,857,143(theN

P

Voftheacquisition),foratotalincreaseinequityof$47,614,286.18.3TheAdjustedPresentValueMethod

(1of2)AdjustedPresentValue(A

P

V)AvaluationmethodtodeterminetheleveredvalueofaninvestmentbyfirstcalculatingitsunleveredvalueandthenaddingthevalueoftheinteresttaxshieldTheUnleveredValueoftheProject

(1of5)ThefirststepintheA

P

Vmethodistocalculatethevalueofthefreecashflowsusingtheproject’scostofcapitalifitwerefinancedwithoutleverage.TheUnleveredValueoftheProject

(2of5)UnleveredCostofCapitalThecostofcapitalforafirmifwereitunleveredForafirmthatmaintainsatargetleverageratio,itcanbeestimatedastheweightedaveragecostofcapitalcomputedwithouttakingintoaccounttaxes(pre-taxW

A

C

C)Wevaluetheinteresttaxshieldseparately.TheUnleveredValueoftheProject(3of5)Thefirm’sunleveredcostofcapitalequalsitspretaxW

A

C

Cbecauseitrepresentsinvestors’requiredreturnforholdingtheentirefirm(equityanddebt).Thisargumentreliesontheassumptionthattheoverallriskofthefirmisindependentofthechoiceofleverage.Inappendix18A.2,weshowthatthetaxshieldwillhavethesameriskasthefirmifthefirmmaintainsatargetleverageratio.TheUnleveredValueoftheProject(4of5)TargetLeverageRatioWhenafirmadjustsitsdebtproportionallytoaproject’svalueoritscashflows(wheretheproportionneednotremainconstant).Aconstantmarketdebt-equityratioisaspecialcase.TheUnleveredValueoftheProject

(5of5)ForAvco,itsunleveredcostofcapitaliscalculatedasTheproject’svaluewithoutleverageiscalculatedasValuingtheInterestTaxShield(1of3)Thevalueof$59.62millionisthevalueoftheunleveredprojectanddoesnotincludethevalueofthetaxshieldprovidedbytheinterestpaymentsondebtTheinteresttaxshieldisequaltotheinterestpaidmultipliedbythecorporatetaxrate.Table18.5ExpectedDebtCapacity,InterestPayments,andTaxShieldforAvco’sRFXProjectValuingtheInterestTaxShield(2of3)ThenextstepistofindthepresentvalueoftheinteresttaxshieldWhenthefirmmaintainsatargetleverageratio,itsfutureinteresttaxshieldshavesimilarrisktotheproject’scashflows,sotheyshouldbediscountedattheproject’sunleveredcostofcapital.ValuingtheInterestTaxShield(3of3)ThetotalvalueoftheprojectwithleverageisthesumofthevalueoftheinteresttaxshieldandthevalueoftheunleveredprojectTheN

P

Voftheprojectis$41.73million.

ThisisexactlythesamevaluefoundusingtheW

A

C

Capproach.TextbookExample18.3(1of2)RiskofTaxShieldswithaConstantDebt-EquityRatioProblemSupposeA

B

CCorporationmaintainsaconstantdebt-equityratioof1,thecurrenttotalvalueofthefirmis$100million,anditsexistingdebtisriskless.OverthenextmonthnewswillcomeoutthatwilleitherraiseorlowerA

B

C

’svalueby20%.HowwillA

B

Cadjustitsdebtlevelinresponse?Whatcanyouconcludeabouttheriskofitsinteresttaxshields?TextbookExample18.3(2of2)SolutionOriginallyA

B

Chas$50millioninequityand$50millionindebt.Oncethenewscomesout,A

B

C

’svaluewillriseto$120millionorfallto$80million.Thus,tomaintainadebtequityratioof1,A

B

C

willeitherincreaseitsdebtlevelto$60millionordecreaseitto$40million.Becausethefirm’sinterestpaymentsandtaxshieldwillfallproportionally,theyhavethesameriskastheoverallfirm.AlternativeExample18.3(1of2)ProblemAssumeR

T

CInc.currentlyhasatotalmarketvalueof$90millionandadebt-equityratioof2.YouexpectthevalueofR

T

Ctojump30%whennewsofitsnewpatentpendingtechnologyisreleased.AssumingyouarecorrectaboutthestockpricereactiontothenewsandR

T

C

wishestomaintainitscurrentdebt-equityratio,howwillitadjustitslevelofdebt?AlternativeExample18.3(2of2)SolutionIfthecurrentfirmvalueis$90millionandthedebt-equityratiois2,thendebtmustbe$60millionandequity$30million.Ifthevalueofthefirmincreasesby30%,itwillbeworth$117million.Debtwillhavetoincreaseto$78milliontomaintainthedebt-equityratioof2.Thefirmwillhave$78millionindebtand$39millioninequitySummaryoftheAPVMethod(1of2)Determinetheinvestment’svaluewithoutleverage.Determinethepresentvalueoftheinteresttaxshield.a.Determinetheexpectedinteresttaxshield.b.Discounttheinteresttaxshield.Addtheunleveredvaluetothepresentvalueoftheinteresttaxshieldtodeterminethevalueoftheinvestmentwithleverage.SummaryoftheAPVMethod(2of2)TheA

P

Vmethodhassomeadvantages.ItcanbeeasiertoapplythantheW

A

C

Cmethodwhenthefirmdoesnotmaintainaconstantdebt-equityratio.TheA

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Vapproachalsoexplicitlyvaluesmarketimperfectionsandthereforeallowsmanagerstomeasuretheircontributiontovalue.TextbookExample18.4(1of3)UsingtheA

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VMethodtoValueanAcquisitionProblemConsideragainAvco’sacquisitionfromExamples18.1and18.2.Theacquisitionwillcontribute$4.25millioninfreecashflowsthefirstyear,whichwillgrowby3%peryearthereafter.Theacquisitioncostof$80millionwillbefinancedwith$50millioninnewdebtinitially.ComputethevalueoftheacquisitionusingtheA

P

Vmethod,assumingAvcowillmaintainaconstantdebt-equityratiofortheacquisition.TextbookExample18.4(2of3)SolutionFirst,wecomputethevaluewithoutleverage.GivenAvco’sunleveredcostofcapitalofWegetAvcowilladdnewdebtof$50millioninitiallytofundtheacquisition.Ata6%interestrate,theinterestexpensethefirstyeariswhichprovidesaninteresttaxshieldofBecausethevalueoftheacquisitionisexpectedtogrowby3%peryear,theamountofdebttheacquisitionsupports—and,therefore,theinteresttaxshield—isexpectedtogrowatthesamerate.ThepresentvalueoftheinteresttaxshieldisTextbookExample18.4(3

of3)ThevalueoftheacquisitionwithleverageisgivenbytheA

P

V:ThisvalueisidenticaltothevaluecomputedinExample18.1andimpliesanN

P

Voffortheacquisition.Withoutthebenefitoftheinteresttaxshield,theN

P

VwouldbeAlternativeExample18.4(1of5)Problem:ConsideragainChittenden’sacquisitionfromAlternativeExamples18.1and18.2.Theacquisitionwillcontribute$5.0millioninfreecashflowsthefirstyear,whichwillgrowby4%peryearthereafter.Theacquisitioncostof$110millionwillbefinancedwith$95,242,857innewdebtinitially.ComputethevalueoftheacquisitionusingtheA

P

Vmethod,assumingChittendenwillmaintainaconstantdebt-equityratiofortheacquisition.AlternativeExample18.4(2of5)SolutionFirst,wecomputethevaluewithoutleverage.UsingEquation18.6,wefirstcalculateChittenden’sunleveredcostofcapital.Assumingthecompany’scostofequityis12.3%,itscostofdebtis8.5%,anditstaxrateis40%,AlternativeExample18.4(3of5)SolutionGiventhefreecashflowof$5millionandthegrowthrateof4%,wegetChittendenwilladdnewdebtofapproximately$95.24millioninitiallytofundtheacquisition.Atan8.5%interestrate,thefirst-yearinterestexpenseiswhichprovidesaninteresttaxAlternativeExample18.4(4of5)SolutionBecausethevalueoftheacquisitionisexpectedtogrowby4%peryear,theamountofdebttheacquisitionsupports—and,therefore,theinteresttaxshield—isexpectedtogrowatthesamerate.ThepresentvalueoftheinteresttaxshieldisAlternativeExample18.4(5of5)SolutionThevalueoftheacquisitionwithleverageisgivenbytheAPV:Thisvalueisidentical(withrounding)tothevaluecomputedinAlternativeExample18.1andimpliesanfortheacquisition.Withoutthebenefitoftheinteresttaxshield,theN

P

Vwouldbe18.3TheAdjustedPresentValueMethod(2of2)WecaneasilyextendtheA

P

Vapproachtoincludeothermarketimperfectionssuchasfinancialdistress,agency,andissuancecosts.Section18.7willelaborateonthesecomplexities.18.4TheFlow-to-EquityMethodFlow-to-EquityAvaluationmethodthatcalculatesthefreecashflowavailabletoequityholderstakingintoaccountallpaymentstoandfromdebtholders.Thecashflowstoequityholdersarethendiscountedusingtheequitycostofcapital.CalculatingtheFreeCashFlowtoEquity(1of2)FreeCashFlowtoEquity(F

C

F

E)Thefreecashflowthatremainsafteradjustingforinterestpayments,debtissuance,anddebtrepayments.ThefirststepintheF

T

Emethodistodeterminetheproject’sfreecashflowtoequity.Table18.6ExpectedFreeCashFlowstoEquityfromAvco’sRFXProjectCalculatingtheFreeCashFlowtoEquity(2of2)TheF

C

F

Ecanalsobecalculated,usingthefreecashflow,asTable18.7ComputingFCFEfromFCFforAvco’sRFXProjectValuingEquityCashFlows(1of2)BecausetheF

C

F

Erepresentpaymentstoequityholders,theyshouldbediscountedattheproject’sequitycostofcapitalGiventhattheriskandleverageoftheR

F

XprojectarethesameasforAvcooverall,wecanuseAvco’sequitycostofcapitalof10.0%todiscounttheproject’sF

C

F

EValuingEquityCashFlows(2of2)Thevalueoftheproject’sF

C

F

Erepresentsthegaintoshareholdersfromtheproject,anditisidenticaltotheN

P

VcomputedusingtheW

A

C

CandA

P

Vmethods.SummaryoftheFlow-to-EquityMethod

(1of2)Determinethefreecashflowtoequityoftheinvestment.Determinetheequitycostofcapital.Computetheequityvaluebydiscountingthefreecashflowtoequityusingtheequitycostofcapital.SummaryoftheFlow-to-EquityMethod

(2of2)TheF

T

EmethodofferssomeadvantagesItmaybesimplertousewhencalculatingthevalueofequityfortheentirefirmifthefirm’scapitalstructureiscomplexandthemarketvaluesofothersecuritiesinthefirm’scapitalstructurearenotknown.Itmaybeviewedasamoretransparentmethodfordiscussingaproject’sbenefittoshareholdersbyemphasizingaproject’simplicationforequity.TheF

T

EmethodhasadisadvantageOnemustcomputetheproject’sdebtcapacitytodeterminetheinterestandnetborrowingbeforecapitalbudgetingdecisionscanbemade.TextbookExample18.5(1of3)UsingtheF

T

EMethodtoValueanAcquisitionProblemConsideragainAvco’sacquisitionfromExamples18.1,18.2,and18.4.Theacquisitionwillcontribute$4.25millioninfreecashflowsthefirstyear,growingby3%peryearthereafter.Theacquisitioncostof$80millionwillbefinancedwith$50millioninnewdebtinitially.WhatisthevalueofthisacquisitionusingtheF

T

Emethod?TextbookExample18.5(2of3)SolutionBecausetheacquisitionisbeingfinancedwith$50millioninnewdebt,theremaining$30millionoftheacquisitioncostmustcomefromequity:Inoneyear,theinterestonthedebtwillbemillion.BecauseAvcomaintainsaconstantdebt-equityratio,thedebtassociatedwiththeacquisitionisalsoexpectedtogrowata3%rate:Therefore,Avcowillborrowanadditionalinoneyear.TextbookExample18.5(3of3)Afteryear1,F

C

F

Ewillalsogrowata3%rate.UsingthecostofequitywecomputetheN

P

V:ThisN

P

V

matchestheresultweobtainedwiththeW

A

C

CandA

P

Vmethods.AlternativeExample18.5(1of4)Problem:ConsideragainChittenden’sacquisitionfromAlternativeExamples18.1and18.2.Theacquisitionwillcontribute$5.0millioninfreecashflowsthefirstyear,whichwillgrowby4%peryearthereafter.Theacquisitioncostof$110millionwillbefinancedwith$95,242,857innewdebtinitially.WhatisthevalueofthisacquisitionusingtheF

T

Emethod?AlternativeExample18.5(2of4)SolutionBecausetheacquisitionisbeingfinancedwith$95.24millioninnewdebt,theremaining$14.76millionoftheacquisitioncostmustcomefromequity:Inoneyear,theinterestonthedebtwillbeAlternativeExample18.5(3of4)SolutionBecauseChittendenmaintainsaconstantdebt-equityratio,thedebtassociatedwiththeacquisitionisalsoexpectedtogrowata4%rate:million.Therefore,Chittendenwillborrowanadditionalinoneyear.AlternativeExample18.5(4of4)SolutionAfteryear1,F

C

F

Ewillalsogrowata4%rate.UsingthecostofequitywecomputetheN

P

V:ThisN

P

VmatchestheresultweobtainedwiththeW

A

C

CandA

P

Vmethods.18.5Project-BasedCostsofCapitalIntherealworld,aspecificprojectmayhavedifferentmarketriskthantheaverageprojectforthefirm.Inaddition,differentprojectswillmayvaryintheamountofleveragetheywillsupport.EstimatingtheUnleveredCostofCapital(1of4)SupposeAvcolaunchesanewplasticsmanufacturingdivisionthatfacesdifferentmarketrisksthanitsmainpackagingbusiness.Theunleveredcostofcapitalfortheplasticsdivisioncanbeestimatedbylookingatothersingle-divisionplasticsfirmsthathavesimilarbusinessrisks.EstimatingtheUnleveredCostofCapital(2of4)Assumetwofirmsarecomparabletotheplasticsdivisionandhavethefollowingcharacteristics:FirmEquityCostofCapitalDebtCostofCapitalDebt-to-ValueRatio,

StartfractionDoverleftparenthesisE+Drightparenthesisendfraction.

Comparable#112.0%6.0%40%Comparable#210.7%5.5%25%EstimatingtheUnleveredCostofCapital(3of4)Assumingthatbothfirmsmaintainatargetleverageratio,theunleveredcostofcapitalforeachcompetitorcanbeestimatedbycalculatingtheirpretaxW

A

C

CEstimatingtheUnleveredCostofCapital(4of4)Basedonthesecomparablefirms,weestimateanunleveredcostofcapitalfortheplasticsdivisionisapproximately9.5%.WiththisrateinhandwecanuseA

P

Vapproach.TouseW

A

C

CorF

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Emethodweneedtoestimatetheproject’sequitycostofcapital,whichdependsontheincrementaldebtthecompanywilltakeonasaresultoftheproject.ProjectLeverageandtheEquityCostofCapital(1of3)Aproject’sequitycostofcapitalmaydifferfromthefirm’sequitycostofcapitaliftheprojectusesatargetleverageratiothatisdifferentthanthefirm’s.Theproject’sequitycostofcapitalcanbecalculatedasfollows:ProjectLeverageandtheEquityCostofCapital(2of3)NowassumethatAvcoplanstomaintainanequalmixofdebtandequityfinancingasitexpandsintoplasticsmanufacturing,anditexpectsitsborrowingcosttobe6%.Giventheunleveredcostofcapitalestimateof9.5%,theplasticsdivision’sequitycostofcapitalisestimatedtobeProjectLeverageandtheEquityCostofCapital(3of3)Thedivision’sW

A

C

CcannowbeestimatedtobeAnalternativemethodforcalculatingthedivision’sW

A

C

CisTextbookExample18.6(1of3)ComputingDivisionalCostsofCapitalProblemHascoCorporationisamultinationalprovideroflumberandmillingequipment.Currently,Hasco’sequitycostofcapitalis12.7%,anditsborrowingcostis6%.Hascohastraditionallymaintaineda40%debt-to-valueratio.HascoengineershavedevelopedaG

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S-basedinventorycontroltrackingsystem,whichthecompanyisconsideringdevelopingcommerciallyasaseparatedivision.Managementviewstheriskofthisinvestmentassimilartothatofothertechnologycompanies’investments,withcomparablefirmstypicallyhavinganunleveredcostofcapitalof15%.SupposeHascoplanstofinancethenewdivisionusing10%debtfinancing(aconstantdebt-to-valueratioof10%)withaborrowingrateof6%,anditscorporatetaxrateis25%.Estimatetheunlevered,equity,andweightedaveragecostsofcapitalforeachdivision.TextbookExample18.6(2of3)SolutionForthelumberandmillingdivision,wecanusethefirm’scurrentequitycostofcapitalanddebt-to-valueratioof40%.ThenTextbookExample18.6(3of3)Forthetechnologydivision,weestimateitsunleveredcostofcapitalusingcomparablefirms:BecauseHasco’stechnologydivisionwillsupport10%debtfinancing,Notethatthecostofcapitalisquitedifferentacrossthetwodivisions.DeterminingtheIncrementalLeverageofaProject(1of3)Todeterminetheequityorweightedaveragecostofcapitalforaproject,theincrementalfinancingthatresultsifthefirmtakesontheprojectneedstobecalculated.DeterminingtheIncrementalLeverageofaProject(2of3)Inotherwords,whatisthechangeinthefirm’stotaldebt(netofcash)withthep