TheCostofCapital(英文版)

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1、The McGraw-Hill Companies,Inc.,200111-1Irwin/McGraw-HillIrwin/McGraw-HillChapter 11Fundamentals of Corporate FinanceThird EditionThe Cost of CapitalBrealey Myers Marcusslides by Matthew WillIrwin/McGraw-HillThe McGraw-Hill Companies,Inc.,2001The McGraw-Hill Companies,Inc.,200111-2Irwin/McGraw-HillTo

2、pics CoveredGeothermals Cost of CapitalWeighted Average Cost of Capital(WACC)Capital StructureRequired Rates of ReturnBig Oils WACCInterpreting WACCFlotation CostsThe McGraw-Hill Companies,Inc.,200111-3Irwin/McGraw-HillCost of CapitalCost of Capital-The return the firms investors could expect to ear

3、n if they invested in securities with comparable degrees of risk.Capital Structure-The firms mix of long term financing and equity financing.The McGraw-Hill Companies,Inc.,200111-4Irwin/McGraw-HillCost of CapitalExample Geothermal Inc.has the following structure.Given that geothermal pays 8%for debt

4、 and 14%for equity,what is the Company Cost of Capital?The McGraw-Hill Companies,Inc.,200111-5Irwin/McGraw-HillCost of CapitalExample-Geothermal Inc.has the following structure.Given that geothermal pays 8%for debt and 14%for equity,what is the Company Cost of Capital?100%$647Assets ValueMarket 70%$

5、453 EquityValueMarket 30%$194 DebtValueMarket The McGraw-Hill Companies,Inc.,200111-6Irwin/McGraw-HillCost of CapitalExample-Geothermal Inc.has the following structure.Given that geothermal pays 8%for debt and 14%for equity,what is the Company Cost of Capital?12.2%=(.7x14%)+(.3x8%)=ReturnPortfolioTh

6、e McGraw-Hill Companies,Inc.,200111-7Irwin/McGraw-HillCost of CapitalExample-Geothermal Inc.has the following structure.Given that geothermal pays 8%for debt and 14%for equity,what is the Company Cost of Capital?12.2%=(.7x14%)+(.3x8%)=ReturnPortfolioInterest is tax deductible.Given a 35%tax rate,deb

7、t only costs us 5.2%(i.e.8%x .65).11.4%=(.7x14%)+(.3x5.2%)=WACCThe McGraw-Hill Companies,Inc.,200111-8Irwin/McGraw-HillWACCWeighted Average Cost of Capital(WACC)-The expected rate of return on a portfolio of all the firms securities.Company cost of capital=Weighted average of debt and equity returns

8、.The McGraw-Hill Companies,Inc.,200111-9Irwin/McGraw-HillWACCrassets(D x r)+(E x r)Vdebtequity=()()rx rx rassetsDVdebtEVequity=+r=assetstotal incomevalue of investmentsThe McGraw-Hill Companies,Inc.,200111-10Irwin/McGraw-HillWACCThree Steps to Calculating Cost of Capital1.Calculate the value of each

9、 security as a proportion of the firms market value.2.Determine the required rate of return on each security.3.Calculate a weighted average of these required returns.The McGraw-Hill Companies,Inc.,200111-11Irwin/McGraw-HillWACCTaxes are an important consideration in the company cost of capital becau

10、se interest payments are deducted from income before tax is calculated.The McGraw-Hill Companies,Inc.,200111-12Irwin/McGraw-HillWACCWeighted-average cost of capital=WACC=x(1-Tc)r+x rDVdebtEVequityThe McGraw-Hill Companies,Inc.,200111-13Irwin/McGraw-HillWACCExample-Executive Fruit has issued debt,pre

11、ferred stock and common stock.The market value of these securities are$4mil,$2mil,and$6mil,respectively.The required returns are 6%,12%,and 18%,respectively.Q:Determine the WACC for Executive Fruit,Inc.The McGraw-Hill Companies,Inc.,200111-14Irwin/McGraw-HillWACCExample-continuedStep 1 Firm Value=4+

12、2+6 =$12 milStep 2Required returns are givenStep 3()()WACC=x(1-.35).06+x.12+x.18=.123 or 12.3%412212612The McGraw-Hill Companies,Inc.,200111-15Irwin/McGraw-HillWACCIssues in Using WACC Debt has two costs.1)return on debt and 2)increased cost of equity demanded due to the increase in risk Betas may c

13、hange with capital structure Corporate taxes complicate the analysis and may change our decision B=x B+x BassetsDVdebtEVequityThe McGraw-Hill Companies,Inc.,200111-16Irwin/McGraw-HillMeasuring Capital StructureIn estimating WACC,do not use the Book Value of securities.In estimating WACC,use the Mark

14、et Value of the securities.Book Values often do not represent the true market value of a firms securities.The McGraw-Hill Companies,Inc.,200111-17Irwin/McGraw-HillMeasuring Capital StructureMarket Value of Bonds-PV of all coupons and par value discounted at the current interest rate.Market Value of

15、Equity-Market price per share multiplied by the number of outstanding shares.The McGraw-Hill Companies,Inc.,200111-18Irwin/McGraw-HillMeasuring Capital StructureBig Oil Book Value Balance Sheet(mil)Bank Debt200$25%LT Bonds200$25%Common Stock100$13%Retained Earnings300$38%Total800$100%The McGraw-Hill

16、 Companies,Inc.,200111-19Irwin/McGraw-HillMeasuring Capital StructureBig Oil Book Value Balance Sheet(mil)Bank Debt200$25%LT Bonds200$25%Common Stock100$13%Retained Earnings300$38%Total800$100%If the long term bonds pay an 8%coupon and mature in 12 years,what is their market value assuming a 9%YTM?7

17、0.185$09.1216.09.11609.11609.1161232PVThe McGraw-Hill Companies,Inc.,200111-20Irwin/McGraw-HillMeasuring Capital StructureBig Oil MARKET Value Balance Sheet(mil)Bank Debt(mil)200.0$12.6%LT Bonds185.7$11.7%Total Debt385.7$24.3%Common Stock1,200.0$75.7%Total1,585.7$100.0%The McGraw-Hill Companies,Inc.

18、,200111-21Irwin/McGraw-HillRequired Rates of ReturnBondsCommon Stockr=YTMdr=CAPM=r+B(r-r)efmfThe McGraw-Hill Companies,Inc.,200111-22Irwin/McGraw-HillRequired Rates of ReturnDividend Discount Model Cost of EquityPerpetuity Growth Model=solve for reP=Divr-g01er=DivP+ge10The McGraw-Hill Companies,Inc.

19、,200111-23Irwin/McGraw-HillRequired Rates of ReturnExpected Return on Preferred StockPrice of Preferred Stock=solve for preferredP=Divr01preferredr=DivPpreferred10The McGraw-Hill Companies,Inc.,200111-24Irwin/McGraw-HillFlotation CostsThe cost of implementing any financing decision must be incorporated into the cash flows of the project being evaluated.Only the incremental costs of financing should be included.This is sometimes called Adjusted Present Value.The McGraw-Hill Companies,Inc.,200111-25Irwin/McGraw-Hill演讲完毕，谢谢观看！