财务管理课件chap012.ppt
Cost of CapitalChapter 1212.1Key Concepts and SkillsnKnow how to determine a firms cost of equity capitalnKnow how to determine a firms cost of debtnKnow how to determine a firms overall cost of capitalnUnderstand pitfalls of overall cost of capital and how to manage them12.2Chapter OutlinenThe Cost of Capital:Some PreliminariesnThe Cost of EquitynThe Costs of Debt and Preferred StocknThe Weighted Average Cost of CapitalnDivisional and Project Costs of Capital12.3Why Cost of Capital Is ImportantnWe know that the return earned on assets depends on the risk of those assetsnThe return to an investor is the same as the cost to the companynOur cost of capital provides us with an indication of how the market views the risk of our assetsnKnowing our cost of capital can also help us determine our required return for capital budgeting projects12.4Required ReturnnThe required return is the same as the appropriate discount rate and is based on the risk of the cash flowsnWe need to know the required return for an investment before we can compute the NPV and make a decision about whether or not to take the investmentnWe need to earn at least the required return to compensate our investors for the financing they have provided12.5Cost of EquitynThe cost of equity is the return required by equity investors given the risk of the cash flows from the firmnThere are two major methods for determining the cost of equitynDividend growth modelnSML or CAPM12.6The Dividend Growth Model ApproachnStart with the dividend growth model formula and rearrange to solve for REgPDRgRDPEE011012.7Dividend Growth Model ExamplenSuppose that your company is expected to pay a dividend of$1.50 per share next year.There has been a steady growth in dividends of 5.1%per year and the market expects that to continue.The current price is$25.What is the cost of equity?111.051.2550.1ER12.8Example:Estimating the Dividend Growth RatenOne method for estimating the growth rate is to use the historical averagenYearDividendPercent Changen19951.23n19961.30n19971.36n19981.43n19991.50(1.30 1.23)/1.23=5.7%(1.36 1.30)/1.30=4.6%(1.43 1.36)/1.36=5.1%(1.50 1.43)/1.43=4.9%Average=(5.7+4.6+5.1+4.9)/4=5.1%12.9Advantages and Disadvantages of Dividend Growth ModelnAdvantage easy to understand and usenDisadvantagesnOnly applicable to companies currently paying dividendsnNot applicable if dividends arent growing at a reasonably constant ratenExtremely sensitive to the estimated growth rate an increase in g of 1%increases the cost of equity by 1%nDoes not explicitly consider risk12.10The SML ApproachnUse the following information to compute our cost of equitynRisk-free rate,RfnMarket risk premium,E(RM)RfnSystematic risk of asset,)(fMEfERRERR12.11Example-SMLnSuppose your company has an equity beta of.58 and the current risk-free rate is 6.1%.If the expected market risk premium is 8.6%,what is your cost of equity capital?nRE=6.1+.58(8.6)=11.1%nSince we came up with similar numbers using both the dividend growth model and the SML approach,we should feel pretty good about our estimate12.12Advantages and Disadvantages of SMLnAdvantagesnExplicitly adjusts for systematic risknApplicable to all companies,as long as we can compute betanDisadvantagesnHave to estimate the expected market risk premium,which does vary over timenHave to estimate beta,which also varies over timenWe are relying on the past to predict the future,which is not always reliable12.13Example Cost of EquitynSuppose our company has a beta of 1.5.The market risk premium is expected to be 9%and the current risk-free rate is 6%.We have used analysts estimates to determine that the market believes our dividends will grow at 6%per year and our last dividend was$2.Our stock is currently selling for$15.65.What is our cost of equity?nUsing SML:RE=6%+1.5(9%)=19.5%nUsing DGM:RE=2(1.06)/15.65+.06=19.55%12.14Cost of DebtnThe cost of debt is the required return on our companys debtnWe usually focus on the cost of long-term debt or bondsnThe required return is best estimated by computing the yield-to-maturity on the existing debtnWe may also use estimates of current rates based on the bond rating we expect when we issue new debtnThe cost of debt is NOT the coupon rate12.15Cost of Debt ExamplenSuppose we have a bond issue currently outstanding that has 25 years left to maturity.The coupon rate is 9%and coupons are paid semiannually.The bond is currently selling for$908.72 per$1000 bond.What is the cost of debt?nN=50;PMT=45;FV=1000;PV=-908.75;CPT I/Y=5%;YTM=5(2)=10%12.16Cost of Preferred StocknRemindersnPreferred generally pays a constant dividend every periodnDividends are expected to be paid every period forevernPreferred stock is an annuity,so we take the annuity formula,rearrange and solve for RPnRP=D/P012.17Cost of Preferred Stock-ExamplenYour company has preferred stock that has an annual dividend of$3.If the current price is$25,what is the cost of preferred stock?nRP=3/25=12%12.18Weighted Average Cost of CapitalnWe can use the i
