财务管理学及财务知识分析(英文版)(PPT 31页)

10 - 23
Why is the cost of retained earnings cheaper than the cost of issuing new
They could buy similar stocks and earn ks, or company could repurchase its own stock and earn ks. So, ks is the cost of retained earnings.
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10 - 1
财务管理学及财务知识 分析(英文版)(PPT 31页)
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10 - 2
What types of capital do firms use?
Debt Preferred stock Common equity:
Use nominal rate. Flotation costs small.
Ignore.
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10 - 7
What’s the cost of preferred stock? Pp = $111.10; 10%Q; Par = $100.
Here (1 – Payout) = Fraction retained.
Close to g = 5% given earlier. Think of bank account paying 10% with payout = 100%, payout = 0%, and payout = 50%. What’s g?
kd, AT = 10% – 10%(0.4) =
6.00%.
A-T Risk Premium on Preferred = 1.92%.
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10 - 13
Why is there a cost for retained earnings?
ks
=
D1 P0
+
g
=
D0(1 + P0
g)
+g
= $4.19(1.05) + 0.05 $50
= 0.088 + 0.05
= 13.8%.
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10 - 18
Suppose the company has been earning 15% on equity (ROE = 15%) and retaining 35% (dividend payout = 65%), and this situation is expected to continue.
Use this formula: kpD P p p$1 $1 1 .1 0 1 00.09 9 0 .0%.
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10 - 8
Picture of Preferred Stock
0
kp = ?
10 - 22
What’s a reasonable final estimate of ks?
Method CAPM DCF kd + RP
Average
Estimate 14.2% 13.8% 14.0% 14.0%
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Therefore, preferred often has a lower B-T yield than the B-T yield on debt.
The A-T yield to an investor, and the A-T cost to the issuer, are higher on preferred than on debt. Consistent with higher risk of preferred.
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Example:
10 - 12
kp = 9% kd = 10% T = 40%
kp, AT = kp – kp (1 – 0.7)(T) = 9% – 9%(0.3)(0.4) =
7.92%.
Should we focus on historical (embedded) costs or new (marginal)
costs?
The cost of capital is used primarily to make decisions that involve raising new capital. So, focus on today’s marginal costs (for WACC).
INPUTS OUTPUT
30
-1153.72 60 1000
N I/YR PV PMT FV
5.0% x 2 = kd = 10%
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Component Cost of Debt
10 - 6
Interest is tax deductible, so kd AT = kd BT(1 – T) = 10%(1 – 0.40) = 6%.
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10 - 14
Opportunity cost: The return stockholders could earn on alternative investments of equal risk.
1
-111.1
2.50
2
...
2.50
2.50
$111.10 =
DQ kPer
=
$2.50 kPer
.
kPer
= $2.50 $111.10
=
2.25%;
kp(Nom) = 2.25%(4) = 9%.
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ks = kd + RP
ห้องสมุดไป่ตู้
= 10.0% + 4.0% = 14.0%
This RP CAPM RP.
Produces ballpark estimate of ks. Useful check.
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Copyright © 2001 by Harcourt, Inc.
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10 - 11
Why is yield on preferred lower than kd?
Corporations own most preferred stock, because 70% of preferred dividends are nontaxable to corporations.
= 7.0% + (6.0%)1.2 = 14.2%.
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10 - 17
What’s the DCF cost of common equity, ks? Given: D0 = $4.19; P0 = $50; g = 5%.
Retained earnings New common stock
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10 - 3
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10 - 4
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10 - 20
Could DCF methodology be applied if g is not constant?
YES, nonconstant g stocks are expected to have constant g at some point, generally in 5 to 10 years.
10 - 9
Note:
Preferred dividends are not tax deductible, so no tax adjustment. Just kp.
Nominal kp is used. Our calculation ignores flotation
costs.
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Earnings can be reinvested or paid out as dividends.
Investors could buy other securities, earn a return.
Thus, there is an opportunity cost if earnings are retained.
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10 - 5
A 15-year, 12% semiannual bond sells for $1,153.72. What’s kd?
0
1
i=?
-1,153.72
60
2
...
60
30 60 + 1,000
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10 - 15
Three ways to determine cost of common equity, ks:
1. CAPM: ks = kRF + (kM – kRF)b.
2. DCF: ks = D1/P0 + g.
3. Own-Bond-Yield-Plus-Risk Premium: ks = kd + RP.
What’s the expected future g?
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Retention growth rate:
10 - 19
g = (1 – Payout)(ROE) = 0.35(15%) = 5.25%.
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10 - 10
Is preferred stock more or less risky to investors than debt?
More risky; company not required to pay preferred dividend.
However, firms try to pay preferred dividend. Otherwise, (1) cannot pay common dividend, (2) difficult to raise additional funds, (3) preferred stockholders may gain control of firm.
But calculations get complicated.
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10 - 21
Find ks using the own-bond-yield-plusrisk-premium method. (kd = 10%, RP = 4%.)
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10 - 16
What’s the cost of common equity based on the CAPM?
kRF = 7%, RPM = 6%, b = 1.2.
ks = kRF + (kM – kRF )b.