财务管理预期报酬率和资本成本
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kP = DP / P0
15-9
Determination of the Cost of Preferred Stock
Assume that Basket Wonders (BW) has preferred stock outstanding with par value of $100, dividend per share of $6.30, and a current market value of
the market is 11.2%
ke = Rf + (Rm - Rf)bj = 4% + (11.2% - 4%)1.25
15-17
ke = 4% + 9% = 13%
Before-Tax Cost of Debt Plus Risk Premium
The cost of equity capital, ke, is the sum of the before-tax cost of debt
ke = Rj = Rf + (Rm - Rf)bj
15-16
Determination of the Cost of Equity (CAPM)
Assume that Basket Wonders (BW) has a company beta of 1.25. Research by Julie Miller suggests that the risk-free rate is 4% and the expected return on
Assume that Basket Wonders (BW) typically adds a 3% premium to the
before-tax cost of debt.
ke = kd + Risk Premium = 10% + 3%
ke = 13%
15-19
Comparison of the Cost of Equity Methods
Determining Project-Specific Required Rate of Return
1. Calculate the required return for Project k (all-equity financed).
Rk = Rf + (Rm - Rf)bk
2. Adjust for capital structure of the firm (financing weights).
ke = ( D1 / P0 ) + g
Assumes that dividends will grow at the constant rate “g” forever.
15-13
Determination of the Cost of Equity Capital
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
$0 + $1,000
$385.54 = (1 + kd)10
15-7
Determination of the Cost of Debt
(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%
15-8
Cost of Preferred Stock
Cost of Preferred Stock is the required rate of return on investment of the preferred shareholders of the company.
Constant Growth Model
13%
Capital Asset Pricing Model 13%
Cost of Debt + Risk Premium 13%
Generally, the three methods will not agree.
15-20
Weighted Average Cost of Capital (WACC)
$70 per share.
kP = $6.30 / $70 kP = 9%
15-10
Cost of Equity Approaches
Dividend Discount Model Capital-Asset Pricing
Model Before-Tax Cost of Debt
plus Risk Premium
15-4
Market Value of Long-Term Financing
Type of Financing
Mkt Val Weight
Long-Term Debt
$ 35M 35%
Preferred Stock
$ 15M 15%
Common Stock Equity $ 50M 50%
$ 100M 100%
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 (costs).
(assume 3 growth phases):
P0 =
a
S
t=1
D0(1+g1)t
(1+ke)t
b
+S
t=a+1
Da(1+g2)t-a
(1+ke)t
+
S
t=b+1
Db(1+g3)t-b
(1+ke)t
15-15
Capital Asset Pricing Model
The cost of equity capital, ke, is equated to the required rate of return in market equilibrium. The risk-return relationship is described by the Security Market Line (SML).
growth rate of 8% forever.
ke = ( D1 / P0 ) + g
ke = ($3(1.08) / $64.80) + .08
15-14 ke = .05 + .08 = .13 or 13%
Growth Phases Model
The growth phases assumption leads to the following formula
15-22
Difficulty in Determining the Expected Return
Determining the SML:
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.
Chapter 15
Required Returns and the Cost of Capital
15-1
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
Use of CAPM in Project Selection:
Initially assume all-equity financing. Determine project beta. Calculate the expected return. Adjust for capital structure of firm. Compare cost to IRR of project.
15-2
Key Sources of Value Creation
Industry Attractiveness
15-3
Growth phase of product
cycle
Barriers to competitive
entry
Other -e.g., patents,
temporary monopoly
15-5
Cost of Debt
Cost of Debt is the required rate
of return on investment of the
lenders of a company.
P = Sn
Ij + Pj
0
j =1 (1 + kd)j
ki = kd ( 1 - T )
15-6
Determination of the Cost of Debt
Assume that Basket Wonders (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%.
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
15-18
Determination of the Cost of Equity (kd + R.P.)
Estimate beta and create the SML.
15-23
Project Acceptance and/or Rejection
EXPECTED RATE OF RETURN
Accept
X
X
XX
X
X
O
O
O O Reject
Rf
O
SML
X O
O
15-24
SYSTEMATIC RISK (Beta)
power, oligopoly
pricing
Cost
Marketing and price
Perceived quality
Supewk.baidu.comior organizational
capability
Competitive Advantage
Overall Cost of Capital of the Firm
n
Cost of Capital = S kx(Wx) x=1
WACC WACC
15-21
= .35(6%) + .15(9%) + .50(13%)
= .021 + .0135 + .065 = .0995 or 9.95%
Determining Project-Specific Required Rates of Return
market price of the stock.
P0 =
D1 (1+ke)1
+
D2 (1+ke)2
+
.
.
.
+
D (1+ke)
15-12
Constant Growth Model
The constant dividend growth assumption reduces the model to:
15-11
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
15-9
Determination of the Cost of Preferred Stock
Assume that Basket Wonders (BW) has preferred stock outstanding with par value of $100, dividend per share of $6.30, and a current market value of
the market is 11.2%
ke = Rf + (Rm - Rf)bj = 4% + (11.2% - 4%)1.25
15-17
ke = 4% + 9% = 13%
Before-Tax Cost of Debt Plus Risk Premium
The cost of equity capital, ke, is the sum of the before-tax cost of debt
ke = Rj = Rf + (Rm - Rf)bj
15-16
Determination of the Cost of Equity (CAPM)
Assume that Basket Wonders (BW) has a company beta of 1.25. Research by Julie Miller suggests that the risk-free rate is 4% and the expected return on
Assume that Basket Wonders (BW) typically adds a 3% premium to the
before-tax cost of debt.
ke = kd + Risk Premium = 10% + 3%
ke = 13%
15-19
Comparison of the Cost of Equity Methods
Determining Project-Specific Required Rate of Return
1. Calculate the required return for Project k (all-equity financed).
Rk = Rf + (Rm - Rf)bk
2. Adjust for capital structure of the firm (financing weights).
ke = ( D1 / P0 ) + g
Assumes that dividends will grow at the constant rate “g” forever.
15-13
Determination of the Cost of Equity Capital
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
$0 + $1,000
$385.54 = (1 + kd)10
15-7
Determination of the Cost of Debt
(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%
15-8
Cost of Preferred Stock
Cost of Preferred Stock is the required rate of return on investment of the preferred shareholders of the company.
Constant Growth Model
13%
Capital Asset Pricing Model 13%
Cost of Debt + Risk Premium 13%
Generally, the three methods will not agree.
15-20
Weighted Average Cost of Capital (WACC)
$70 per share.
kP = $6.30 / $70 kP = 9%
15-10
Cost of Equity Approaches
Dividend Discount Model Capital-Asset Pricing
Model Before-Tax Cost of Debt
plus Risk Premium
15-4
Market Value of Long-Term Financing
Type of Financing
Mkt Val Weight
Long-Term Debt
$ 35M 35%
Preferred Stock
$ 15M 15%
Common Stock Equity $ 50M 50%
$ 100M 100%
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 (costs).
(assume 3 growth phases):
P0 =
a
S
t=1
D0(1+g1)t
(1+ke)t
b
+S
t=a+1
Da(1+g2)t-a
(1+ke)t
+
S
t=b+1
Db(1+g3)t-b
(1+ke)t
15-15
Capital Asset Pricing Model
The cost of equity capital, ke, is equated to the required rate of return in market equilibrium. The risk-return relationship is described by the Security Market Line (SML).
growth rate of 8% forever.
ke = ( D1 / P0 ) + g
ke = ($3(1.08) / $64.80) + .08
15-14 ke = .05 + .08 = .13 or 13%
Growth Phases Model
The growth phases assumption leads to the following formula
15-22
Difficulty in Determining the Expected Return
Determining the SML:
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.
Chapter 15
Required Returns and the Cost of Capital
15-1
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
Use of CAPM in Project Selection:
Initially assume all-equity financing. Determine project beta. Calculate the expected return. Adjust for capital structure of firm. Compare cost to IRR of project.
15-2
Key Sources of Value Creation
Industry Attractiveness
15-3
Growth phase of product
cycle
Barriers to competitive
entry
Other -e.g., patents,
temporary monopoly
15-5
Cost of Debt
Cost of Debt is the required rate
of return on investment of the
lenders of a company.
P = Sn
Ij + Pj
0
j =1 (1 + kd)j
ki = kd ( 1 - T )
15-6
Determination of the Cost of Debt
Assume that Basket Wonders (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%.
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
15-18
Determination of the Cost of Equity (kd + R.P.)
Estimate beta and create the SML.
15-23
Project Acceptance and/or Rejection
EXPECTED RATE OF RETURN
Accept
X
X
XX
X
X
O
O
O O Reject
Rf
O
SML
X O
O
15-24
SYSTEMATIC RISK (Beta)
power, oligopoly
pricing
Cost
Marketing and price
Perceived quality
Supewk.baidu.comior organizational
capability
Competitive Advantage
Overall Cost of Capital of the Firm
n
Cost of Capital = S kx(Wx) x=1
WACC WACC
15-21
= .35(6%) + .15(9%) + .50(13%)
= .021 + .0135 + .065 = .0995 or 9.95%
Determining Project-Specific Required Rates of Return
market price of the stock.
P0 =
D1 (1+ke)1
+
D2 (1+ke)2
+
.
.
.
+
D (1+ke)
15-12
Constant Growth Model
The constant dividend growth assumption reduces the model to:
15-11
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