公司理財羅斯Ch2

1、McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-0CHAPTER12Risk, Cost of Capital, and Capital BudgetingMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-1Chapter Outline12.1 The Cost of Equity Capita

2、l12.2 Estimation of Beta12.3 Determinants of Beta12.4 Extensions of the Basic Model12.5 Estimating International Papers Cost of Capital12.6 Reducing the Cost of Capital12.7 Summary and ConclusionsMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-2Wha

3、ts the Big Idea?Earlier chapters 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.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-3Invest in

4、 project12.1 The Cost of Equity CapitalFirm withexcess cashShareholders Terminal ValuePay cash dividendShareholder invests 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

5、 expected return on a financial asset of comparable risk.A firm with excess cash can either pay a dividend or make a capital investmentMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-4The Cost of EquityFrom the firms perspective, the expected retur

6、n is the Cost of Equity Capital:To estimate a firms cost of equity capital, we need to know three things:)(FMiFiRRRR-+=The risk-free rate, RFFMRR-The market risk premium,2,)(),(MMiMMiiRVarRRCov=The company beta,McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights R

7、eserved.12-5ExampleSuppose the stock of Stansfield Enterprises, a publisher of PowerPoint presentations, has a beta of 2.5. The firm is 100-percent equity financed. Assume a risk-free rate of 5-percent and a market risk premium of 10-percent.What is the appropriate discount rate for an expansion of

8、this firm?)(FMiFRRRR-+=%105 . 2%5+=R%30=RMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-6Example (continued) Suppose Stansfield Enterprises is evaluating the following non-mutually exclusive projects. Each costs $100 and lasts one year.ProjectProj

9、ect b bProjects Estimated Cash Flows Next YearIRRNPV at 30%A2.5$15050%$15.38B2.5$13030%$0C2.5$11010%-$15.38McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-7Using the SML to Estimate the Risk-Adjusted Discount Rate for ProjectsAn all-equity firm sho

10、uld accept a project whose IRR exceeds 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%2.5ABCMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-812.

11、2 Estimation of Beta: Measuring Market RiskMarket Portfolio - Portfolio of all assets in the economy. In practice a 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.McGraw-Hill/IrwinCorpor

12、ate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-912.2 Estimation of BetaTheoretically, the calculation of beta is straightforward:Problems Betas may vary over time. The sample size may be inadequate. Betas are influenced by changing financial leverage and business risk.S

13、olutionsProblems 1 and 2 (above) can be moderated by more sophisticated statistical techniques.Problem 3 can be lessened by adjusting for changes in business and financial risk.1. Look at average beta estimates of comparable firms in the industry.(,)()iMMCov R RVar R=McGraw-Hill/IrwinCorporate Finan

14、ce, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-10Stability of BetaMost analysts argue that betas are generally stable for firms remaining in the same industry.Thats not to say that a firms beta cant change.Changes in product lineChanges in technologyDeregulationChanges in financ

15、ial leverageMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-11Using an Industry BetaIt is frequently argued 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

16、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 operations of the rest of the industry, you should use the firms beta.Dont forget about adjustments for financial leverage.McGraw-Hill/IrwinCor

17、porate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-1212.3 Determinants of BetaBusiness RiskCyclicity of RevenuesOperating LeverageFinancial RiskFinancial LeverageMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-13Cyclica

18、lity of RevenuesHighly cyclical stocks have high 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

19、standard deviations need not have high betas.Movie studios have revenues that are variable, depending upon whether they produce “hits” or “flops”, but their revenues are not especially dependent upon the business cycle.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All

20、Rights Reserved.12-14Operating LeverageThe degree of operating leverage measures how sensitive a firm (or project) is to its fixed costs. Operating leverage increases as fixed costs rise and variable costs fall.Operating leverage magnifies the effect of cyclicity on beta.The degree of operating leve

21、rage is given by:DOL = EBITD SalesSalesD EBITMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-15Operating LeverageVolume$Fixed costsTotal costsD EBITD VolumeOperating leverage increases as fixed costs rise and variable costs fall.Fixed costsTotal co

22、stsMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-16Financial Leverage and BetaOperating leverage refers to the sensitivity to the firms fixed costs of production.Financial leverage is the sensitivity of a firms fixed costs of financing.The relati

23、onship 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 + EquityDebtbDebt+ Debt + EquityEquity bEquityMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Right

24、s Reserved.12-17When Debt0,McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-18Financial Leverage and Beta: ExampleConsider Grand Sport, Inc., which is currently all-equity and has a beta of 0.90.The firm has decided to lever up to a capital structur

25、e 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 bEquitybEquity = 2 0.90 = 1.80McGraw-Hill/IrwinCorporate Finance, 7/e 20

26、05 The McGraw-Hill Companies, Inc. All Rights Reserved.12-19Multiple choiceSlippery Slope Roof Contracting has an equity beta of 1.2, capital structure with 2/3 debt, and a zero tax rate. What is their asset beta? A)0.40 B)0.72 C)1.20 D)1.80 E)None of the above McGraw-Hill/IrwinCorporate Finance, 7/

27、e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-209. Answer: ARationale: bA = (E/(D+E) bE =(1/3)(1.2) = .40McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-21The Johnson Guitar Company is considering buying a company that has no financ

28、ial leverage but an asset beta of 0.70. The market risk premium is 6% and the risk-free rate is 2%. If they plan to use 75% debt, what will the required rate of return be? A)6.2% B)8% C)14.6% D)18.8% E)There is not enough information provided. McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-

29、Hill Companies, Inc. All Rights Reserved.12-2210. Answer: D Rationale: bE = .71 + .75/.25) = .7(4) = 2.8KE = .02 + 2.8(.06) = .02 + .168 = .188 = 18.8%McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-2312.4 Extensions of the Basic ModelThe Firm vers

30、us the ProjectThe Cost of Capital with DebtMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-24The Firm versus the ProjectAny projects cost of capital depends on the use to which the capital is being putnot the source. Therefore, it depends on the ri

31、sk of the project and not the risk of the company. McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-25Capital Budgeting & Project RiskA firm that uses one discount rate for all projects may over time increase the risk of the firm while decreasing it

32、s value.Project IRRFirms risk (beta)SMLrfbFIRMIncorrectly rejected positive NPV projectsIncorrectly accepted negative NPV projectsHurdle rate)(FMFIRMFRRR-+The SML can tell us why:McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-26Suppose the Conglom

33、erate 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 14% 4% This is a breakdown of the companys investment projects:1/3 Automotive retailer b = 2.01/3 Computer Hard Drive Mfr. b = 1.31/3 Elec

34、tric 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 RiskMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-27Capital Budgeting & Project

35、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 discount rates.SMLMcGraw-Hill/Irw

36、inCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-28The Cost of Capital with DebtThe Weighted Average Cost of Capital is given by:It is because interest expense is tax-deductible that we multiply the last term by (1 TC)rWACC = Equity + Debt Equity rEquity + Equity

37、+ Debt Debt rDebt (1TC)rWACC = S + BS rS + S + BB rB (1 TC)McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-29Read the example on p332B=40M,S=60M, rB =15%,=1.41,T=34%RM-RF=9.5%, RF=11% rWACC=? rs= RF+ (RM-RF) =11%+1.41*9.5%=24.4% =60/(60+40)*24.4%+4

38、0/(60+40)*15%*(1-34%)=18.6%rWACC = S + BS rS + S + BB rB (1 TC)McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-30Read the example on p333B/S=0.6=0.6/1, rB=15.5%,rs =20%,Tc=34%S/(S+B)=1/1.6=0.625,B/(S+B)=0.6/1.6=0.375=0.625*20%+0.375*15.5%*(1-34%)=1

39、6.25%rWACC = S + BS rS + S + BB rB (1 - TC)McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-31Problem 12.12 on p341McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-3212.12Apply the CAPM to estimate

40、Adobe Onlines cost of equity, RS. The following equation expresses the firms required return, RS, in terms of the firms beta, bS, the risk-free rate, RF, and the market return, M. RS = RF + b ( M RF) = 0.07 + 1.29 (0.13 0.07)= 0.1474Adobe Onlines cost of equity is 14.74%. RMcGraw-Hill/IrwinCorporate

41、 Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-33rWACC = S / (S+B) rS + B / (S+B) rB (1 TC)= (0.5) (0.1474) + (0.5) (0.07) (1 0.35)= 0.09645The weighted average cost of capital is 9.645%. McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Righ

42、ts Reserved.12-3412.5 Estimating International Papers Cost of Capital(p333)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

43、by weighting these two costs appropriately.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-3512.5 Estimating IPs Cost of CapitalThe 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

44、 capital is rS = RF + bi ( RM RF)= 3% + 0.828.4%= 9.89%McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-3612.5 Estimating IPs Cost of CapitalThe yield on the companys debt is 8% and the firm is in the 37% marginal tax rate.The debt to value ratio is

45、 32%8.34 percent 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% + 0.32 8% (1 0.37) = 8.34%rWACC = S + BS rS +

46、 S + BB rB (1 TC)McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-3712.6 Reducing the Cost of CapitalWhat is Liquidity?Liquidity, Expected Returns and the Cost of CapitalLiquidity and Adverse SelectionWhat the Corporation Can DoMcGraw-Hill/IrwinCorp

47、orate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-38What is Liquidity?The idea that the expected return on a stock 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 a

48、nd the firms cost of capital are negatively related to the liquidity of the firms shares as well.Those stocks that are expensive to trade are considered less liquid than those that trade cheaply.The trading costs of holding a firms shares include brokerage fees, the bid-ask spread and market impact

49、costs.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-39Liquidity, Expected Returnsand the Cost of CapitalThe cost of trading an illiquid stock reduces the total return that an investor receives.Investors thus will demand a high expected return whe

50、n investing in stocks with high trading costs.This high expected return implies a high cost of capital to the firm.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-40Liquidity and the Cost of CapitalCost of CapitalLiquidityAn increase in liquidity,

51、i.e. a reduction in trading costs, lowers a firms cost of capital.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-41Liquidity and Adverse SelectionThere are a number of factors that determine the liquidity of a stock.One of these factors is adverse

52、 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 the bid-ask spreads, and the higher the required return on equity.McGraw-Hill/IrwinCorporate

53、 Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-42What the Corporation Can DoThe 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 t

54、he adverse selection costs thereby lowering bid-ask spreads.This idea is a new one and empirical evidence is not yet in.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-43What the Corporation Can DoCompanies can also facilitate stock purchases throu

55、gh the Internet.Direct stock purchase plans and dividend reinvestment plans handles on-line allow small investors the opportunity to buy securities cheaply.The companies can also disclose more information. Especially to security analysts, to narrow the gap between informed and uninformed traders. Th

56、is should reduce spreads.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-44Economic value added and the measurement of financial performanceEVA can simply be viewed as earnings after capital costsEVA=ROA- rwaccTotal capital=EBIT(1-Tc)-rwacc *Total

57、capitalRead the example on p345McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-4512.7 Summary and ConclusionsThe expected return on any capital budgeting project should be at least as great as the expected return on a financial asset of comparable

58、risk. Otherwise the shareholders would prefer the firm to pay a dividend.The expected return on any asset is dependent upon b.A projects required return depends on the projects b.A projects b can be estimated by considering comparable industries or the cyclicality of project revenues and the project

59、s operating leverage.If the firm uses debt, the discount rate to use is the rWACC.In order to calculate rWACC, the cost of equity and the cost of debt applicable to a project must be estimated.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.12-46Multiple choices1. The WACC is used to _ the expected cash flows when the firm has _ . A)discount; debt and equity in the capital structure B)discount; short term financing on the balance sheet C)increase; debt and equity in the capital structure D)decrease; short term f