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1、Chapter 16 Financial Leverage and Capital Structure Policy,3/28/2020,灸雄铰呕榜亮跌窑伶早跟钨誊芽雍秽桌槛楼氨佩衫密后葱颤雄亚榷糟拇挎公司理财教学资料 chap016公司理财教学资料 chap016,Chapter Outline,The Capital Structure Question The Effect of Financial Leverage Capital Structure and the Cost of Equity Capital M&M Propositions I and II with Corpor
2、ate Taxes Bankruptcy Costs Optimal Capital Structure The Pie Again The Pecking-Order Theory Observed Capital Structures A Quick Look at the Bankruptcy Process,16-2,3/28/2020,歧疥生桥体肝忌川钧概妇夷孽欢悼士锦五晃喊赃酣缆吵搭皆住母狱哄事蛊公司理财教学资料 chap016公司理财教学资料 chap016,Capital Restructuring,We are going to look at how changes in
3、capital structure affect the value of the firm, all else equal Capital restructuring involves changing the amount of leverage a firm has without changing the firms assets The firm can increase leverage by issuing debt and repurchasing outstanding shares The firm can decrease leverage by issuing new
4、shares and retiring outstanding debt,16-3,3/28/2020,搀登势象胎略搽织歇稻赚嚼垦丫敢闹莉坝羔陪碧漾劈法艾赵给砾澎碑盼什公司理财教学资料 chap016公司理财教学资料 chap016,Choosing a Capital Structure,What is the primary goal of financial managers? Maximize stockholder wealth We want to choose the capital structure that will maximize stockholder wealth
5、We can maximize stockholder wealth by maximizing the value of the firm or minimizing the WACC,16-4,3/28/2020,鹏床先宅迫谎荒锨奸哗塞轿篓灼逝对陷擂尧回缝阻术杀佰殃纷亲跑豌列虏公司理财教学资料 chap016公司理财教学资料 chap016,The Effect of Leverage,How does leverage affect the EPS and ROE of a firm? When we increase the amount of debt financing, we i
6、ncrease the fixed interest expense If we have a really good year, then we pay our fixed cost and we have more left over for our stockholders If we have a really bad year, we still have to pay our fixed costs and we have less left over for our stockholders Leverage amplifies the variation in both EPS
7、 and ROE,16-5,3/28/2020,烘娃之平裸噪籽颜另溃颇镜诧吹毁夺诫碰二蛤惨嘉孰渠媳痕呈若垦黔绷膀公司理财教学资料 chap016公司理财教学资料 chap016,Example: Financial Leverage, EPS and ROE Part I,We will ignore the effect of taxes at this stage What happens to EPS and ROE when we issue debt and buy back shares of stock?,16-6,3/28/2020,诺虏傍渴仍郑豺殴公阔接囚遁呸咖彦氖账狡最巷霸
8、觅蜒掷峪怎拧芍澳挎痹公司理财教学资料 chap016公司理财教学资料 chap016,Example: Financial Leverage, EPS and ROE Part II,Variability in ROE Current: ROE ranges from 6% to 20% Proposed: ROE ranges from 2% to 30% Variability in EPS Current: EPS ranges from $0.60 to $2.00 Proposed: EPS ranges from $0.20 to $3.00 The variability in
9、 both ROE and EPS increases when financial leverage is increased,16-7,3/28/2020,谭内诈诊嫡较扭雷孝甩孵雄峪戌抠楼咸逊炒囚骏厦匹觅妒婆昌绢留烃罕乱公司理财教学资料 chap016公司理财教学资料 chap016,Break-Even EBIT,Find EBIT where EPS is the same under both the current and proposed capital structures If we expect EBIT to be greater than the break-even
10、point, then leverage may be beneficial to our stockholders If we expect EBIT to be less than the break-even point, then leverage is detrimental to our stockholders,16-8,3/28/2020,郴抬副觅离尸词别碌曲报阻场谐秘鹊呛换角傀怔止挤烃羊钮切谩货壮炯达公司理财教学资料 chap016公司理财教学资料 chap016,Example: Break-Even EBIT,16-9,3/28/2020,妒棚惰磨奄砖村民豁拒敝嫂虾兹帘绒
11、熏瞅腆穴鞠庚呐诱垃哉瘴腺猩掺围冗公司理财教学资料 chap016公司理财教学资料 chap016,Example: Homemade Leverage and ROE,Current Capital Structure Investor borrows $500 and uses $500 of her own to buy 100 shares of stock Payoffs: Recession: 100(0.60) - .1(500) = $10 Expected: 100(1.30) - .1(500) = $80 Expansion: 100(2.00) - .1(500) = $
12、150 Mirrors the payoffs from purchasing 50 shares of the firm under the proposed capital structure,Proposed Capital Structure Investor buys $250 worth of stock (25 shares) and $250 worth of bonds paying 10%. Payoffs: Recession: 25(.20) + .1(250) = $30 Expected: 25(1.60) + .1(250) = $65 Expansion: 25
13、(3.00) + .1(250) = $100 Mirrors the payoffs from purchasing 50 shares under the current capital structure,16-10,3/28/2020,卓过邵登坠河据瞧渴苯骇堂较不轩技佑鞍钓躁孜沁腹拱艳木本厉润石乞牵公司理财教学资料 chap016公司理财教学资料 chap016,Capital Structure Theory,Modigliani and Miller (M&M)Theory of Capital Structure Proposition I firm value Proposit
14、ion II WACC The value of the firm is determined by the cash flows to the firm and the risk of the assets Changing firm value Change the risk of the cash flows Change the cash flows,16-11,3/28/2020,拯暑缮和鸥界忙锭呼涟痢褐旦殴硅斧栽谭瞧那浚详总林套俞寥曲泰陶誉龟公司理财教学资料 chap016公司理财教学资料 chap016,Capital Structure Theory Under Three S
15、pecial Cases,Case I Assumptions No corporate or personal taxes No bankruptcy costs Case II Assumptions Corporate taxes, but no personal taxes No bankruptcy costs Case III Assumptions Corporate taxes, but no personal taxes Bankruptcy costs,16-12,3/28/2020,倍养谨民荆吻肝撬庶胚乙讼珠男他那稀顽研轨搐记时投酶增林匝趴种奎镀公司理财教学资料 chap
16、016公司理财教学资料 chap016,Case I Propositions I and II,Proposition I The value of the firm is NOT affected by changes in the capital structure The cash flows of the firm do not change; therefore, value doesnt change Proposition II The WACC of the firm is NOT affected by capital structure,16-13,3/28/2020,寐
17、却惋券玩祁腹殃奔八糙侄扯秆胚拉吟约埔眠社躲癌蓟貌弄咒紧颗囱瑟权公司理财教学资料 chap016公司理财教学资料 chap016,Case I - Equations,WACC = RA = (E/V)RE + (D/V)RD RE = RA + (RA RD)(D/E) RA is the “cost” of the firms business risk, i.e., the risk of the firms assets (RA RD)(D/E) is the “cost” of the firms financial risk, i.e., the additional return
18、required by stockholders to compensate for the risk of leverage,16-14,3/28/2020,饺旨菊寡辛芯粮浮憎绷稻懂牵颖利币旦控础征症慧裕廉东倾埠闸喉炭师答公司理财教学资料 chap016公司理财教学资料 chap016,Figure 16.3,16-15,3/28/2020,蓟仿盂喻转楷坝拐晴谆究埋得骄毁乎铀价雪涸羔帖宇揍瓢亡岔谬欣秆恢善公司理财教学资料 chap016公司理财教学资料 chap016,Case I - Example,Data Required return on assets = 16%; cost of
19、 debt = 10%; percent of debt = 45% What is the cost of equity? RE = 16 + (16 - 10)(.45/.55) = 20.91% Suppose instead that the cost of equity is 25%, what is the debt-to-equity ratio? 25 = 16 + (16 - 10)(D/E) D/E = (25 - 16) / (16 - 10) = 1.5 Based on this information, what is the percent of equity i
20、n the firm? E/V = 1 / 2.5 = 40%,16-16,3/28/2020,严钢杠滔檬侧刃捉沮同衣雪掷舷溢恨簿茨巧涅粮磊碗究觉掂研畔十若讯儒公司理财教学资料 chap016公司理财教学资料 chap016,The CAPM, the SML and Proposition II,How does financial leverage affect systematic risk? CAPM: RA = Rf + A(RM Rf) Where A is the firms asset beta and measures the systematic risk of the f
21、irms assets Proposition II Replace RA with the CAPM and assume that the debt is riskless (RD = Rf) RE = Rf + A(1+D/E)(RM Rf),16-17,3/28/2020,啡冉抠贴挫速盏奖滞迭茸姓馅烫雄创赦量锭砧反疲轩剖仙悦齿蒂颧抨庸聪公司理财教学资料 chap016公司理财教学资料 chap016,Business Risk and Financial Risk,RE = Rf + A(1+D/E)(RM Rf) CAPM: RE = Rf + E(RM Rf) E = A(1 +
22、D/E) Therefore, the systematic risk of the stock depends on: Systematic risk of the assets, A, (Business risk) Level of leverage, D/E, (Financial risk),16-18,3/28/2020,掏址希遵拍吓半惋被逝随叠骑太暖喻敞搅掷书立雁焰琼结拓卿消近竖剪九公司理财教学资料 chap016公司理财教学资料 chap016,Case II Cash Flow,Interest is tax deductible Therefore, when a firm
23、 adds debt, it reduces taxes, all else equal The reduction in taxes increases the cash flow of the firm How should an increase in cash flows affect the value of the firm?,16-19,3/28/2020,皿击缕忆婶粥匀殿滚橡兰侥宦座殊略适更拎进癣帚维缠佯膛囱殖坯色莉缠公司理财教学资料 chap016公司理财教学资料 chap016,Case II - Example,16-20,3/28/2020,廊疤副恐岂扒桔缺姬俄拽怜芒烈
24、狈柠证涣簇剔炉泄谜吟惶辛朔至最妆婉爬公司理财教学资料 chap016公司理财教学资料 chap016,Interest Tax Shield,Annual interest tax shield Tax rate times interest payment 6,250 in 8% debt = 500 in interest expense Annual tax shield = .34(500) = 170 Present value of annual interest tax shield Assume perpetual debt for simplicity PV = 170 /
25、.08 = 2,125 PV = D(RD)(TC) / RD = DTC = 6,250(.34) = 2,125,16-21,3/28/2020,溅良胶蹭窖绢罕树敌棺帘轰躇痉扔再上陨醋牵咯安迎稠甫卜生辕襄钙燥挫公司理财教学资料 chap016公司理财教学资料 chap016,Case II Proposition I,The value of the firm increases by the present value of the annual interest tax shield Value of a levered firm = value of an unlevered fir
26、m + PV of interest tax shield Value of equity = Value of the firm Value of debt Assuming perpetual cash flows VU = EBIT(1-T) / RU VL = VU + DTC,16-22,3/28/2020,晴疯悍姓源防定样以庇绵纵氰赡静凑撞钱湛泣瓜既握奏院琶现槛窝肺壬锋公司理财教学资料 chap016公司理财教学资料 chap016,Example: Case II Proposition I,Data EBIT = 25 million; Tax rate = 35%; Debt
27、 = $75 million; Cost of debt = 9%; Unlevered cost of capital = 12% VU = 25(1-.35) / .12 = $135.42 million VL = 135.42 + 75(.35) = $161.67 million E = 161.67 75 = $86.67 million,16-23,3/28/2020,耻军绵坝爪箕菊裕削锚社吻舆咳掸卷甲江浮傅骸炬嚎拼券提知沉淫筹钾盔公司理财教学资料 chap016公司理财教学资料 chap016,Figure 16.4,16-24,3/28/2020,送岁鸽虚坦衍浚翟窗玄距掖摸汗
28、阅赃仁膘申组进邹禾逐性彤掀脾任挤耪铱公司理财教学资料 chap016公司理财教学资料 chap016,Case II Proposition II,The WACC decreases as D/E increases because of the government subsidy on interest payments RA = (E/V)RE + (D/V)(RD)(1-TC) RE = RU + (RU RD)(D/E)(1-TC) Example RE = 12 + (12-9)(75/86.67)(1-.35) = 13.69% RA = (86.67/161.67)(13.6
29、9) + (75/161.67)(9)(1-.35) RA = 10.05%,16-25,3/28/2020,桨谤卓钥贰噬吮闸鼻旅申佣遥矾苗婚策京立姨汕珠铜忌呕斧葱收浑阐佃讶公司理财教学资料 chap016公司理财教学资料 chap016,Example: Case II Proposition II,Suppose that the firm changes its capital structure so that the debt-to-equity ratio becomes 1. What will happen to the cost of equity under the new
30、 capital structure? RE = 12 + (12 - 9)(1)(1-.35) = 13.95% What will happen to the weighted average cost of capital? RA = .5(13.95) + .5(9)(1-.35) = 9.9%,16-26,3/28/2020,挑荆旭脾掐投蝎面惕炔票收阻修蒸简朴拆渭柔瘫偏问桶伎号掇以胳雹摈尺公司理财教学资料 chap016公司理财教学资料 chap016,Figure 16.5,16-27,3/28/2020,笋驶厕着恩媚日显草沮渗眺市塞贺呻歹瘤咸崔抉狗断者跋制铺辩剁日雹墩公司理财教学
31、资料 chap016公司理财教学资料 chap016,Case III,Now we add bankruptcy costs As the D/E ratio increases, the probability of bankruptcy increases This increased probability will increase the expected bankruptcy costs At some point, the additional value of the interest tax shield will be offset by the increase in
32、expected bankruptcy cost At this point, the value of the firm will start to decrease, and the WACC will start to increase as more debt is added,16-28,3/28/2020,衡轰刁钨赔洪送桶弃砧煞杠亦危言壤肃治沟怒堂殷饭册八拽财栅萝宜存牺公司理财教学资料 chap016公司理财教学资料 chap016,Bankruptcy Costs,Direct costs Legal and administrative costs Ultimately cau
33、se bondholders to incur additional losses Disincentive to debt financing Financial distress Significant problems in meeting debt obligations Firms that experience financial distress do not necessarily file for bankruptcy,16-29,3/28/2020,缠常墓章另焙苛临扫芭圃航网柏鲸包闰泻罚风能晒竭虱饭啸堂酪书恢毫桌公司理财教学资料 chap016公司理财教学资料 chap01
34、6,More Bankruptcy Costs,Indirect bankruptcy costs Larger than direct costs, but more difficult to measure and estimate Stockholders want to avoid a formal bankruptcy filing Bondholders want to keep existing assets intact so they can at least receive that money Assets lose value as management spends
35、time worrying about avoiding bankruptcy instead of running the business The firm may also lose sales, experience interrupted operations and lose valuable employees,16-30,3/28/2020,惜市虐蕾踊御浴蜘惑开狐悍粱惹乌帽山禄篆牵训妒梦绒胁荒挣愁猩补脾一公司理财教学资料 chap016公司理财教学资料 chap016,Figure 16.6,16-31,3/28/2020,香假培抄幻氦许望墅钦将规杠轮晨妙倔赎发串朝匙搔剥拴蓉兰
36、诌弥况敢阐公司理财教学资料 chap016公司理财教学资料 chap016,Figure 16.7,16-32,3/28/2020,邮戍尔陷沂卤鞭疮赏育挑括轧稼瘸兆抄瞬咖彦键妄殃深赂诲骚埂必鞍刹稗公司理财教学资料 chap016公司理财教学资料 chap016,Conclusions,Case I no taxes or bankruptcy costs No optimal capital structure Case II corporate taxes but no bankruptcy costs Optimal capital structure is almost 100% deb
37、t Each additional dollar of debt increases the cash flow of the firm Case III corporate taxes and bankruptcy costs Optimal capital structure is part debt and part equity Occurs where the benefit from an additional dollar of debt is just offset by the increase in expected bankruptcy costs,16-33,3/28/
38、2020,聂初主握砂绥等寒疚得源栅俞峨编铂诈鸣嚏以娩惩肯役襟邪鞭图榨盎吸柠公司理财教学资料 chap016公司理财教学资料 chap016,Figure 17.8,16-34,3/28/2020,痴笑站临荣映刺逝岩掳姻郴静综拓涎腑宽遂耍链攀嫌肺口路牧巢醚替缄遥公司理财教学资料 chap016公司理财教学资料 chap016,Managerial Recommendations,The tax benefit is only important if the firm has a large tax liability Risk of financial distress The greater
39、 the risk of financial distress, the less debt will be optimal for the firm The cost of financial distress varies across firms and industries, and as a manager you need to understand the cost for your industry,16-35,3/28/2020,忻作筹耍焉娃据捻靶含涤榜贝奖殆宿窖惹糯勒陨卡仁酗棒晚逆踊经阵醚怎公司理财教学资料 chap016公司理财教学资料 chap016,Figure 16
40、.9,16-36,3/28/2020,艇硷暴红淬搞恩官啃兜隔蒂衫踩阂财奈皆谍霄萨天挪瞪永谬姐损浙搞别咆公司理财教学资料 chap016公司理财教学资料 chap016,The Value of the Firm,Value of the firm = marketed claims + nonmarketed claims Marketed claims are the claims of stockholders and bondholders Nonmarketed claims are the claims of the government and other potential st
41、akeholders The overall value of the firm is unaffected by changes in capital structure The division of value between marketed claims and nonmarketed claims may be impacted by capital structure decisions,16-37,3/28/2020,身高轻屡坦然防呈粉砒皑察舷热烯议楷朵资页耀憨辞守设娜假普纹药菠熔公司理财教学资料 chap016公司理财教学资料 chap016,The Pecking-Orde
42、r Theory,Theory stating that firms prefer to issue debt rather than equity if internal financing is insufficient. Rule 1 Use internal financing first Rule 2 Issue debt next, new equity last The pecking-order theory is at odds with the tradeoff theory: There is no target D/E ratio Profitable firms us
43、e less debt Companies like financial slack,16-38,3/28/2020,匡应堵洛卫谗宣棠校希撬玛期肿乳碉霓毯内梁婚庶戚坞宋氦关兵开谜矿怠公司理财教学资料 chap016公司理财教学资料 chap016,Observed Capital Structure,Capital structure does differ by industry Differences according to Cost of Capital 2008 Yearbook by Ibbotson Associates, Inc. Lowest levels of debt C
44、omputers with 5.61% debt Drugs with 7.25% debt Highest levels of debt Cable television with 162.03% debt Airlines with 129.40% debt,16-39,3/28/2020,付蜡荷掖妊晚形滚冶荧末泅汝尤打尤赊慰官殴搔铃业呆易痰注矛尚盼攀虫公司理财教学资料 chap016公司理财教学资料 chap016,Bankruptcy Process Part I,Business failure business has terminated with a loss to credi
45、tors Legal bankruptcy petition federal court for bankruptcy Technical insolvency firm is unable to meet debt obligations Accounting insolvency book value of equity is negative,16-40,3/28/2020,删动迢斯邵檬绅财省庞哆累遁隋拨滩帚吃丙符邮敲钮秒镰杏诱泣釉皑果纷公司理财教学资料 chap016公司理财教学资料 chap016,Bankruptcy Process Part II,Liquidation Chap
46、ter 7 of the Federal Bankruptcy Reform Act of 1978 Trustee takes over assets, sells them and distributes the proceeds according to the absolute priority rule Reorganization Chapter 11 of the Federal Bankruptcy Reform Act of 1978 Restructure the corporation with a provision to repay creditors,16-41,3
47、/28/2020,越鸣涡锯胸射肠椽遏圾共磺淡市知往哈碌朴冰苇探择语刘粤斯句哀雄疡弯公司理财教学资料 chap016公司理财教学资料 chap016,Quick Quiz,Explain the effect of leverage on EPS and ROE What is the break-even EBIT, and how do we compute it? How do we determine the optimal capital structure? What is the optimal capital structure in the three cases that w
48、ere discussed in this chapter? What is the difference between liquidation and reorganization?,16-42,3/28/2020,意篓求跑牙丢慢没癸拨放糊社感腿橱俐恋快怪净昧彻梗且竣相盘廖琉耍匀公司理财教学资料 chap016公司理财教学资料 chap016,Comprehensive Problem,Assuming perpetual cash flows in Case II - Proposition I, what is the value of the equity for a firm wi
49、th EBIT = $50 million, Tax rate = 40%, Debt = $100 million, cost of debt = 9%, and unlevered cost of capital = 12%?,16-43,3/28/2020,狗宋藕邮窍琐遇优谋粘报村慢硝九恿卡瘩畦镁声澜鬃埔铅叫炽警贷霸谬炒公司理财教学资料 chap016公司理财教学资料 chap016,Key Concepts and Skills,Understand the effect of financial leverage on cash flows and the cost of equity Understand the impact of taxes and bankruptcy on capital structure choice Understand the basic components of the bankruptcy process,16-44,3/28/2020,壤彭肖戌粟篇暑宛栏冀才亨铁拓往艳业宿宠驼关盐岛媒贡刀碎档绸答欢版公司理财教学资料 chap016公司理财教学资料 chap016,