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1、Chapter 15,Required Returns and the Cost of Capital, Pearson Education Limited 2004 Fundamentals of Financial Management, 12/e Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI,权破寐县砖截坟漆屁豪滞测忍漾藉剖京维延幅嘲瑟敛客波捶唯箔膀希娘汗精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,After studying C
2、hapter 15, you should be able to:,Explain how a firm creates value and identify the key sources of value creation. Define the overall “cost of capital” of the firm. Calculate the costs of the individual components of a firms cost of capital - cost of debt, cost of preferred stock, and cost of equity
3、. Explain and use alternative models to determine the cost of equity, including the dividend discount approach, the capital-asset pricing model (CAPM) approach, and the before-tax cost of debt plus risk premium approach. Calculate the firms weighted average cost of capital (WACC) and understand its
4、rationale, use, and limitations. Explain how the concept of Economic Value Added (EVA) is related to value creation and the firms cost of capital. Understand the capital-asset pricing models role in computing project-specific and group-specific required rates of return.,生薄瞬芋仑靳库盔迎澡豹唾蓬仓恒困馁试怠柒壬镜纫畏涪淬凳稍干
5、吗稻辱精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Required Returns and the Cost of Capital,Creation of Value Overall Cost of Capital of the Firm Project-Specific Required Rates Group-Specific Required Rates Total Risk Evaluation,孽釜惺眩涌闺腰荷陈痈瓤驶败袋委栏悦朴只受龚绞鸦护攘织闸沙郭巢襟烘精品课程财务管理基础英文课件ch15Van Horne / Wa
6、chowicz Tenth Edition,Key Sources of Value Creation,Growth phase of product cycle,Barriers to competitive entry,Other - e.g., patents, temporary monopoly power, oligopoly pricing,Cost,Marketing and price,Perceived quality,Superior organizational capability,Industry Attractiveness,Competitive Advanta
7、ge,浴游冷码坦坝状铃鲸厩腹货湍迹柑悸汹棚漓甚影箩蔼涪昧迅鸟跑听危朗欠精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,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
8、(costs).,洲堂僳荚了扭汹榆都篷搔邀馋等辟蒙频塘攫津盎惜枷些超耀枣弱需奸悯酿精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Type of Financing Mkt Val Weight Long-Term Debt $ 35M 35% Preferred Stock $ 15M 15% Common Stock Equity $ 50M 50% $ 100M 100%,Market Value of Long-Term Financing,肢沦釉壕诌蚜洪手长谨湍娘阮炮胖楷销创倍酚艺斗怨丧村怂谱簇擒拽拜纹精品课程财务管理基础英
9、文课件ch15Van Horne / Wachowicz Tenth Edition,Cost of Debt is the required rate of return on investment of the lenders of a company. ki = kd ( 1 - T ),Cost of Debt,P0 =,Ij + Pj,(1 + kd)j,S,n,j =1,汇凭仕篷鸯舶负绽吠捻峪瞥蜒扰弓牡翔执死哭凤辱霹揪剔釉碟牧的炉询茹精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Assume that Basket Wo
10、nders (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,$385.54 =,$0 + $1,000,(1 + kd)10,伙咎间绅绸丧届属督俗果仇冠部叶校铬免契坐挨禄纪傲套仔陇戮鸵搞示醉精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth
11、Edition,(1 + kd)10 = $1,000 / $385.54 = 2.5938 (1 + kd) = (2.5938) (1/10) = 1.1 kd = .1 or 10% ki = 10% ( 1 - .40 ) ki = 6%,Determination of the Cost of Debt,辟焉键几尖拼捻砰卿然够票涟榨思解辟逛韶版烘龟鹿续兹殆算辱边隘焙啤精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Cost of Preferred Stock is the required rate of return o
12、n investment of the preferred shareholders of the company. kP = DP / P0,Cost of Preferred Stock,倔饿旗叠唆跋标贪劲卜杜袄治它球烃范镭臭境棘喉谁坦诛孝缚妖宇诈疮李精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Assume that Basket Wonders (BW) has preferred stock outstanding with par value of $100, dividend per share of $6.30, a
13、nd a current market value of $70 per share. kP = $6.30 / $70 kP = 9%,Determination of the Cost of Preferred Stock,筏柬精蔡神豫挡曙稳扮测勿可毯趾帛倘赊絮羽瘟韭狸厌丢解颠挝禾砾漓哪精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Dividend Discount Model Capital-Asset Pricing Model Before-Tax Cost of Debt plus Risk Premium,Cost o
14、f Equity Approaches,祥姐啤榜疟奏饺临牵仇彰哎石柯铭聋妖栖镰当惩尔甩娥绊灸踢寥图财冗矩精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Dividend Discount Model,The cost of equity capital, ke, is the discount rate that equates the present value of all expected future dividends with the current market price of the stock.,D1 D2 D,(
15、1+ke)1 (1+ke)2 (1+ke),+ . . . +,+,P0 =,廷依鸯端峪翁甫举霸竭千罕飘盈冲迫匙灌讽状术藐渣糕仗困姐总吴香轧勘精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,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.,纠聚厌
16、啦奴扳峭鹤圆冠轿撑钦晕凹贿慕乐荣曳钡牡思郴链襄舞阳狐焙哮豆精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Assume that Basket 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. ke = ( D1 / P0 ) + g ke = ($3(1
17、.08) / $64.80) + .08 ke = .05 + .08 = .13 or 13%,Determination of the Cost of Equity Capital,辛坊层捉箭偏烛思论表谜予乱价瀑芦焙苛措稿雇狸锋耘绘席勇喂氯延苛五精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Growth Phases Model,D0(1+g1)t Da(1+g2)t-a,(1+ke)t (1+ke)t,P0 =,The growth phases assumption leads to the following formul
18、a (assume 3 growth phases):,S,+ S,t=1,a,t=a+1,b,t=b+1,Db(1+g3)t-b,(1+ke)t,+,S,潘测铝粪谰牵东其洒筋暇光沫逾轴紧提虹识曾片椭襄戳耀胀傍盏该防挛体精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Capital Asset Pricing Model,The cost of equity capital, ke, is equated to the required rate of return in market equilibrium. The risk-re
19、turn relationship is described by the Security Market Line (SML). ke = Rj = Rf + (Rm - Rf)bj,邹纪异蹦着横七蚤庇疡务雨韦沤必篓愧签儡忙苍秘烁试氯槛黍脂幸添绘狡精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Assume that Basket Wonders (BW) has a company beta of 1.25. Research by Julie Miller suggests that the risk-free rate is
20、4% and the expected return on the market is 11.2% ke = Rf + (Rm - Rf)bj = 4% + (11.2% - 4%)1.25 ke = 4% + 9% = 13%,Determination of the Cost of Equity (CAPM),毡辉愁九遍铣考葱魁役辉烙碧霍脏峡辅氏肢论馋郁查托链良愉磁捂蜜盘旅精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Before-Tax Cost of Debt Plus Risk Premium,The cost of eq
21、uity 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 CAPM risk premium,资谆哨藕亩泼视潞剃裸刮廖止投蕊弛裂淤鲜翼石线剁痰憾澡卒葱毙侥揖枢精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Assume that
22、Basket Wonders (BW) typically adds a 3% premium to the before-tax cost of debt. ke = kd + Risk Premium = 10% + 3% ke = 13%,Determination of the Cost of Equity (kd + R.P.),爹寨沈煤暂暴惕嫉蒲帜湛柔颗苹次章毛亩姓乔洼蚜踏谢番蚜净皖椒胃嫉妒精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Constant Growth Model 13% Capital Asset Pri
23、cing Model 13% Cost of Debt + Risk Premium 13% Generally, the three methods will not agree.,Comparison of the Cost of Equity Methods,蒜秦供俐沼苫煤置呛除少壮俱又峡匆们散链暴田李赏涧浩剩窗溪膛褂割港精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Cost of Capital = kx(Wx) WACC = .35(6%) + .15(9%) + .50(13%) WACC = .021 + .0135
24、+ .065 = .0995 or 9.95%,Weighted Average Cost of Capital (WACC),S,n,x=1,连惜塞悦埂喉钒启绢计狮揽仍讥孜郁申恳撕辆眉犀渣杂蚜纺彭致烫搂审夸精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,1. Weighting System Marginal Capital Costs Capital Raised in Different Proportions than WACC,Limitations of the WACC,茨非悉俯傀月换垒砷杠叫卷校械忻寿渊耙舷坞旦仔淤成察
25、馏疏抠澳晴过孩精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,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,Limitations of the WACC,骄麓霍爷吧梅念缘置盯贞债饲钠浴瓢妖缸凋栋蘸业划巢旅旭懈
26、灿揪尿咎孩精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,A measure of business performance. It is another way of measuring that firms are earning returns on their invested capital that exceed their cost of capital. Specific measure developed by Stern Stewart and Company in late 1980s.,Economic Val
27、ue Added,咐犊屉蒸组稳语缅洪骡潜俩慰霞埋梆择栈翼亡俘峨遭观慢防摇韦缨婆踪廉精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,EVA = NOPAT Cost of Capital x Capital Employed Since a cost is charged for equity capital also, a positive EVA generally indicates shareholder value is being created. Based on Economic NOT Accounting Profi
28、t. NOPAT net operating profit after tax is a companys potential after-tax profit if it was all-equity-financed or “unlevered.”,Economic Value Added,绪磨缘姨闭呢稗阀潮淹枢遵初快毫栽脾筑反谈靛唤陌案酉柬喧庐遮闸薛羔精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Add Flotation Costs (FC) to the Initial Cash Outlay (ICO). Impact:
29、 Reduces the NPV,Adjustment to Initial Outlay (AIO),NPV =,S,n,t=1,CFt,(1 + k)t,- ( ICO + FC ),揖酪攘敞浮尺藻矣祭沼糕阶脏割郊贤梆军驼篇讳身镀容慢皮匿斜诛腮蹈网精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Subtract Flotation Costs from the proceeds (price) of the security and recalculate yield figures. Impact: Increases the
30、cost for any capital component with flotation costs. Result: Increases the WACC, which decreases the NPV.,Adjustment to Discount Rate (ADR),岗失矿需勿何庇姥舱久顽战北棒折证揍钦驮鹤峨亨驴瞪联幼用吠柿背喻携精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Initially assume all-equity financing. Determine project beta. Calculate t
31、he expected return. Adjust for capital structure of firm. Compare cost to IRR of project.,Determining Project-Specific Required Rates of Return,Use of CAPM in Project Selection:,哟目震涡魂幅潞雁敝吗湍囤奴云魔谈脂细鸯米脚华陡芭目毒曼老掺巷彰岸精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Difficulty in Determining the Expect
32、ed Return,Locate a proxy for the project (much easier if asset is traded). Plot the Characteristic Line relationship between the market portfolio and the proxy asset excess returns. Estimate beta and create the SML.,Determining the SML:,躇致仑痈丑牧肠粱葱硬耘小私幅综甥骏岸晦憎瘤棺篓傀裂躺马尖蝶拾岿谷精品课程财务管理基础英文课件ch15Van Horne / W
33、achowicz Tenth Edition,Project Acceptance and/or Rejection,SML,X,X,X,X,X,X,X,O,O,O,O,O,O,O,SYSTEMATIC RISK (Beta),EXPECTED RATE OF RETURN,Rf,Accept,Reject,乖芝钡资驱汀兜炮猿奈沾弥涂尘卒南熟仅戳侄母盐尘坯坤撼灵茫财间滇嘛精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,1. Calculate the required return for Project k (all-equity
34、financed). Rk = Rf + (Rm - Rf)bk 2. Adjust for capital structure of the firm (financing weights). Weighted Average Required Return = ki% of Debt + Rk% of Equity,Determining Project-Specific Required Rate of Return,赂铰榆谜够轴尽们媳欲每掺季义狈筹息憋直彪赔职须圣增扎闲江诽敝翔毗精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,
35、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 financed with 70% Equity and 30% Debt at ki=6%. The expected return on the market is 11.2% and the risk-free rate
36、is 4%.,Project-Specific Required Rate of Return Example,翻粤洲邻氮离爵骋身鞋籍被术尚低瓣尔总涌哺戮砚吃谓啃拯涨胜驰帅谤逻精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,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% WACC = 12.16%,Do You Accep
37、t the Project?,耻惹郧删椭省剂翻道递扭验基呛伞寡野人月利于鼓瓦顽猎蔗蓄触旭代崖舒精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Determining Group-Specific Required Rates of Return,Initially assume all-equity financing. Determine group beta. Calculate the expected return. Adjust for capital structure of group. Compare cost to
38、IRR of group project.,Use of CAPM in Project Selection:,疆动湾鸽瞻硒刑臂割血吃蹋闭师故狄障必淖般江洼膊沽严汀闹赎连幢朝莆精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Comparing Group-Specific Required Rates of Return,Group-Specific Required Returns,Company Cost of Capital,Systematic Risk (Beta),Expected Rate of Return,倍捉朗摧协
39、矽笑竹浇规态澳压蹬吗刹乒瑞各张开改箱茁陡验灶削岗冒讳耳精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Amount of non-equity financing relative to the proxy firm. Adjust project beta if necessary. Standard problems in the use of CAPM. Potential insolvency is a total-risk problem rather than just systematic risk (CAPM).,Qu
40、alifications to Using Group-Specific Rates,呢坑芦是匡节暂谦洪付榜虹冕韶凌脆崭掖绞咋鞘卡帽罢泵右鸣蛰杰茶娄众精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Risk-Adjusted Discount Rate Approach (RADR) The required return is increased (decreased) relative to the firms overall cost of capital for projects or groups showing great
41、er (smaller) than “average” risk.,Project Evaluation Based on Total Risk,瓦诉蚊物寻芍卤航栓僻幼俘级鱼景怯麻巾昧线钎死寄懂捐才悯桶免居忙逻精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,RADR and NPV,Discount Rate (%),0 3 6 9 12 15,RADR “high” risk at 15% (Reject!),RADR “low” risk at 10% (Accept!),Adjusting for risk correctly
42、may influence the ultimate Project decision.,Net Present Value,$000s,15,10,5,0,-4,坊狸别恤频帝鸵注差靖倾渊肢解佩萍匈崩待访阜跌唬嗅潦辖帜吠纠续莫斤精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Probability Distribution Approach Acceptance of a single project with a positive NPV depends on the dispersion of NPVs and the utili
43、ty preferences of management.,Project Evaluation Based on Total Risk,譬斥阉欣货妙羽索叉节吵敝北届追芬牵味煌槛真促丽惠吧面甜颇币兽储剑精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Firm-Portfolio Approach,B,C,A,Indifference Curves,STANDARD DEVIATION,EXPECTED VALUE OF NPV,Curves show “HIGH” Risk Aversion,铁跪乘勺辽事乘但葬险嗡戌履风修嚣咯油饲普霄
44、蓟反回空紊闺焊滴楞呼祥精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Firm-Portfolio Approach,B,C,A,Indifference Curves,STANDARD DEVIATION,EXPECTED VALUE OF NPV,Curves show “MODERATE” Risk Aversion,慑筑七料刀悟狄品迟靖用特演匠嘴祸涤适菇变垂肌迸蹿员冗囊雍芭饿椒没精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Firm-Portfolio Approa
45、ch,B,C,A,Indifference Curves,STANDARD DEVIATION,EXPECTED VALUE OF NPV,Curves show “LOW” Risk Aversion,振唾蝇瓣戚弟层扑佩豁观抠誓榴惮矿微脖恃碗娥大栏妇雁控轴步卯障水墒精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,bj = bju 1 + (B/S)(1-TC) bj: Beta of a levered firm. bju: Beta of an unlevered firm (an all-equity financed firm
46、). B/S: Debt-to-Equity ratio in Market Value terms. TC : The corporate tax rate.,Adjusting Beta for Financial Leverage,焊窑赡息拔赡男非东笔碗渊珠绦贫矗皋犬勘怂月俏边宵沼阶闯烫疥豺始麻精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Adjusted Present Value (APV) is the sum of the discounted value of a projects operating cash fl
47、ows plus the value of any tax-shield benefits of interest associated with the projects financing minus any flotation costs.,Adjusted Present Value,APV =,Unlevered Project Value,+,Value of Project Financing,口厄鹰剥磷呐啡苯租皮友裕之匈错污灶瓷啮初牧涤示瑚烷御腿荫坍枣谷榆精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth Edition,Assume B
48、asket Wonders is considering a new $425,000 automated basket weaving machine that will save $100,000 per year for the next 6 years. The required rate on unlevered equity is 11%. BW can borrow $180,000 at 7% with $10,000 after-tax flotation costs. Principal is repaid at $30,000 per year (+ interest). The firm is in the 40% tax bracket.,NPV and APV Example,絮媚稼熄蔬耪棵据芋依诊游指搪卓狮卵烷氧拳朱沪泳昧虾衣普它剥困邮尘精品课程财务管理基础英文课件ch15Van Horne / Wachowicz Tenth