财务管理ch07资本成本

1、Chapter 07,Required Returns and the Cost of Capital 要求报酬与资本成本,Overall Cost of Capital of the Firm,Cost of Capital is the required rate of return on the various types of financing. The overall cost of capital is a weighted average of the individual required rates of return (costs).,Type of Financing

2、Mkt ValWeight Long-Term Debt $ 35M 35% Preferred Stock$ 15M 15% Common Stock Equity $ 50M 50% $ 100M 100%,Market Value of Long-Term Financing,Cost of Debt,The cost of debt is the required return on our companys debt We usually focus on the cost of long-term debt or bonds The required return is best

3、estimated by computing the yield-to-maturity on the existing debt We may also use estimates of current rates based on the bond rating we expect when we issue new debt The cost of debt is NOT the coupon rate,Cost of Debt is the required rate of return on investment of the lenders of a company. ki = k

4、d ( 1 - T ),Cost of Debt,P0 =,Ij + Pj,(1 + kd)j,S,n,j =1,Assume that Basket Wonders (BW) has $1,000 par value zero-coupon bonds outstanding. BW bonds are currently trading at $385.54 with 10 years to maturity. BW tax bracket is 40%.,Determination of the Cost of Debt,Determination of the Cost of Debt

5、,Cost of Preferred Stock is the required rate of return on investment of the preferred shareholders of the company. kP = DP / P0,Cost of Preferred Stock,Assume that Basket Wonders (BW) has preferred stock outstanding with par value of $100, dividend per share of $6.30, and a current market value of

6、$70 per share.,Determination of the Cost of Preferred Stock,Dividend Discount Model Capital-Asset Pricing Model Before-Tax Cost of Debt plus Risk Premium,Cost of Equity Approaches,Dividend Discount Model,The cost of equity capital, ke, is the discount rate that equates the present value of all expec

7、ted future dividends with the current market price of the stock.,D1 D2 D,(1+ke)1 (1+ke)2 (1+ke),+ . . . +,+,P0 =,Constant Growth Model,The constant dividend growth assumption reduces the model to: ke = ( D1 / P0 ) + g Assumes that dividends will grow at the constant rate “g” forever.,Assume that Bas

8、ket Wonders (BW) has common stock outstanding with a current market value of $64.80 per share, current dividend of $3 per share, and a dividend growth rate of 8% forever.,Determination of the Cost of Equity Capital,Capital Asset Pricing Model,The cost of equity capital, ke, is equated to the require

9、d rate of return in market equilibrium. The risk-return relationship is described by the Security Market Line (SML). ke = Rj = Rf + (Rm - Rf)bj,Assume that Basket Wonders (BW) has a company beta of 1.25. Research by Julie Miller suggests that the risk-free rate is 4% and the expected return on the m

10、arket is 11.2%,Determination of the Cost of Equity (CAPM),Before-Tax Cost of Debt Plus Risk Premium,The cost of equity capital, ke, is the sum of the before-tax cost of debt and a risk premium in expected return for common stock over debt. ke = kd + Risk Premium* * Risk premium is not the same as CA

11、PM risk premium,Assume that Basket Wonders (BW) typically adds a 3% premium to the before-tax cost of debt. ke =,Determination of the Cost of Equity (kd + R.P.),Constant Growth Model13% Capital Asset Pricing Model13% Cost of Debt + Risk Premium13% Generally, the three methods will not agree.,Compari

12、son of the Cost of Equity Methods,Dividend Growth Model Example,Suppose that your company is expected to pay a dividend of $1.50 per share next year. There has been a steady growth in dividends of 5.1% per year and the market expects that to continue. The current price is $25. What is the cost of eq

13、uity?,Example Cost of Equity,Suppose our company has a beta of 1.5. The market risk premium is expected to be 9% and the current risk-free rate is 6%. We have used analysts estimates to determine that the market believes our dividends will grow at 6% per year and our last dividend was $2. Our stock

14、is currently selling for $15.65. What is our cost of equity? Using SML: RE = 6% + 1.5(9%) = 19.5% Using DGM: RE = 2(1.06) / 15.65 + .06 = 19.55%,Cost of Capital = kx(Wx) WACC = .35(6%) + .15(9%) + .50(13%) WACC = .021 + .0135 + .065 = .0995 or 9.95%,Weighted Average Cost of Capital (WACC),S,n,x=1,1.

15、Weighting System Marginal Capital Costs Capital Raised in Different Proportions than WACC,Limitations of the WACC,2.Flotation Costs are the costs associated with issuing securities such as underwriting, legal, listing, and printing fees. a.Adjustment to Initial Outlay b.Adjustment to Discount Rate,L

16、imitations of the WACC,Add Flotation Costs (FC) to the Initial Cash Outlay (ICO). Impact: Reduces the NPV,Adjustment to Initial Outlay (AIO),NPV =,S,n,t=1,CFt,(1 + k)t,- ( ICO + FC ),Subtract Flotation Costs from the proceeds (price) of the security and recalculate yield figures. Impact: Increases t

17、he cost for any capital component with flotation costs. Result: Increases the WACC, which decreases the NPV.,Adjustment to Discount Rate (ADR),1. Calculate the required return for Project k (all-equity financed). Rk = Rf + (Rm - Rf)bk 2.Adjust for capital structure of thefirm (financing weights). We

18、ighted Average Required Return =ki% of Debt + Rk% of Equity,Determining Project-Specific Required Rate of Return,Assume a computer networking project is being considered with an IRR of 19%. Examination of firms in the networking industry allows us to estimate an all-equity beta of 1.5. Our firm is f

19、inanced with 70% Equity and 30% Debt at ki=6%. The expected return on the market is 11.2% and the risk-free rate is 4%.,Project-Specific Required Rate of Return Example,ke = Rf + (Rm - Rf)bj = 4% + (11.2% - 4%)1.5 ke = 4% + 10.8% = 14.8% WACC = .30(6%) + .70(14.8%)= 1.8% + 10.36%= 12.16% IRR = 19% W

20、ACC = 12.16%,Do You Accept the Project?,Extended Example WACC - I,Equity Information 50 million shares $80 per share Beta = 1.15 Market risk premium = 9% Risk-free rate = 5%,Debt Information $1 billion in outstanding debt (face value) Current quote = 110 Coupon rate = 9%, semiannual coupons 15 years

21、 to maturity Tax rate = 40%,Extended Example WACC - II,What is the cost of equity? RE = 5 + 1.15(9) = 15.35% What is the cost of debt? N = 30; PV = -1100; PMT = 45; FV = 1000; CPT I/Y = 3.9268 RD = 3.927(2) = 7.854% What is the after-tax cost of debt? RD(1-TC) = 7.854(1-.4) = 4.712%,Extended Example WACC - III,What are the capital structure weights? E = 50 million (80) = 4 billion D = 1 billion (1.10) = 1.1 billion V =