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1、Chapter+10+cc5-11财务管理财务管理10-2What sources of long-term capital do firms use?10-3Should our analysis focus on historical (embedded) costs or new (marginal) costs?nThe cost of capital is used primarily to make decisions that involve raising new capital. So, focus on todays marginal costs.10-4Cost of d
2、ebt rd is the marginal cost of debt capital. nThe yield to maturity on outstanding L-T debt is often used as a measure of rd.nWhy tax-adjust, i.e. why rd(1-T)?10-5Should our analysis focus on before-tax or after-tax capital costs?nStockholders focus on A-T CFs. Therefore, we should focus on A-T capi
3、tal costs, i.e. use A-T costs of capital. Only rd needs adjustment, because interest is tax deductible.10-6Cost of debtA 15-year, 12% semiannual coupon bond sells for $1,153.72. What is the cost of debt (rd)?10-7Continued n-1,153.72 PV, 60 PMT, 1,000 FV,n30 N, I/Y = 5nRemember, the bond pays a semia
4、nnual coupon, so rd = 5.0% x 2 = 10%.10-8Component cost of debtnInterest is tax deductible, so A-T rd = B-T rd (1-T) = 10% (1 - 0.40) = 6%nFlotation costs are small, so ignore them.10-9Cost of preferred stockrp is the marginal cost of preferred stock, which is the return investors require on a firms
5、 preferred stock.nPreferred dividends are not tax-deductible, so no tax adjustments necessary. Just use nominal rp.10-10A preferred stock with a $9 annual dividend, $3 flotation cost, and the current price of $100.nThe cost of preferred stock can be solved by using this formula:nrp = Dp / (Pp F) = $
6、9 / $97 = 9.28%Ex. Par value = $60, the current price = $50,Dividend rate = 10%, flotation cost = 5%,Then rp =10-11Cost of equity nrs is the marginal cost of common equity using retained earnings.nThe rate of return investors require on the firms common equity using new equity is re.10-12Why is ther
7、e a cost for retained earnings?nEarnings can be reinvested or paid out as dividends.nInvestors could buy other securities, earn a return.nIf earnings are retained, there is an opportunity cost (the return that stockholders could earn on alternative investments of equal risk).nInvestors could buy sim
8、ilar stocks and earn rs.nFirm could repurchase its own stock and earn rs.10-13Three ways to determine the cost of common equity, rsnCAPM: rs = rRF + (rM rRF) bnDCF:rs = (D1 / P0) + gnOwn-Bond-Yield-Plus-Risk-Premium:rs = rd + RP10-14If the rRF = 7%, MRP = 6%, and the firms beta is 1.2, whats the cos
9、t of common equity based upon the CAPM?rs = rRF + (rM rRF) b = 7.0% + (6.0%)1.2 = 14.2%10-15If D0 = $4.19, P0 = $50, and g = 5%, whats the cost of common equity based upon the DCF approach? D1 = D0 (1 + g) D1 = $4.19 (1 + .05) D1 = $4.3995 rs = (D1 / P0) + g = ($4.3995 / $50) + 0.05= 13.8%10-16What
10、is the expected future growth rate?nThe firm has been earning 15% on equity (ROE = 15%) and retaining 35% of its earnings (dividend payout = 65%). This situation is expected to continue.g = ( 1 Payout ) (ROE)= (0.35) (15%)= 5.25%nVery close to the g that was given before.10-17If rd = 10% and RP = 4%
11、, what is rs using the own-bond-yield-plus-risk-premium method?nThis RP is not the same as the CAPM MRP.nThis method produces a ballpark estimate of rs, and can serve as a useful check.rs = rd + RPrs = 10.0% + 4.0% = 14.0%10-18What is a reasonable final estimate of rs?MethodEstimateCAPM 14.2%DCF 13.
12、8%rd + RP 14.0% Average 14.0%In general, weighted average should be used.10-19Why is the cost of retained earnings cheaper than the cost of issuing new common stock?nWhen a company issues new common stock they also have to pay flotation costs to the underwriter.nIssuing new common stock may send a n
13、egative signal to the capital markets, which may depress the stock price.10-20If issuing new common stock incurs a flotation cost of 15% of the proceeds, what is re?10-21Flotation PremiumnFP = reDCF rsDCF = 15.4% - 13.8% = 1.6%.nTherefore, re = rs + FP = 14% + 1.6% = 15.6%.10-22Calculating the weigh
14、ted average cost of capitalWACC = wdrd(1-T) + wprp + wcrs nThe ws refer to the firms capital structure weights.nThe rs refer to the cost of each component.10-23How are the weights determined?WACC = wdrd(1-T) + wprp + wcrs nUse accounting numbers or market value (book vs. market weights)?nUse actual
15、numbers or target capital structure?10-24Ignoring flotation costs, what is the firms WACC?If the target (optimal) capital structure is 60% common equity, 30% debt, and 10% preferred stock, and the tax rate is 40%;WACC = wdrd(1-T) + wprp + wcrs = 0.3(10%)(0.6) + 0.1(9.28%) + 0.6(14%) = 1.8% + 0.928% + 8.4% = 11.13%10-25What factors influence a companys composite WACC?nMarket conditions.nThe firms capital structure and dividend policy.nThe firms investment policy. Firms with riskier projects generally have a higher WACC.
