财务管理ppt英文课件Cha(6)

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Optimal Capital Structure: Traditional Approach
Traditional Approach
.25 .20 .15 .10 .05
0
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Capital Costs (%)
ke ko
ki Optimal Capital Structure
Financial Leverage (B / S)
at ko).
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The Modigliani-Miller Theorem (intuition)
It is after the ball game and the pizza man is delivering a pizza to Yogi .
“Should I cut it into four slices as usual, Yogi?” asks the pizza man.
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Capital Structure
• Capital Structure -- The mix (or proportion) of a firm’s permanent longterm financing represented by debt, preferred stock, and common stock
• Critical assumption is ko remains constant. • An increase in cheaper debt funds is exactly offset by an increase in the
required rate of return on equity. • As long as ki is constant, ke is a linear function of the debt-to-equity ratio. • Thus, there is no one optimal capital structure.
debt-to-equity ratio. • Thus, there is a optimal capital structure when B/V is 100%.
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Net Operating Income Approach
• Net Operating Income Approach -- A theory of capital structure in which the weighted average cost of capital and the total value of the firm remain constant as financial leverage is changed. Assume: – Both ki and ko remain constant.
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Summary of the Traditional Approach
• The cost of capital is dependent on the capital structure of the firm. –Initially, low-cost debt is not rising and replaces more expensive equity financing and ko declines. –Then, increasing financial leverage and the associated increase in ke and ki more than offsets the benefits of lower cost debt financing.
theory of the firm
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A Conceptual Look --Relevant Rates of Return
ko = an overall capitalization rate for the firm
OO
ko = VV
=
Net operating income Total market value of the firm
+ ke
S B+S
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Net Income Approach
• Net Income Approach -- A theory of capital structure in which the weighted average cost of capital will decrease and the total value of the firm will increase as financial leverage is becoming greater. Assume: – Both ki and ke are unrelated to the financial leverage.
Chapter 17
Capital Structure
Determination
Chapter Objectives
• Discuss the impact of financial leverage on a firm’s capital structure. • Outline both MM Proposition I and MM Proposition II. • Discuss the impact of corporate taxes on MM Propositions I and II. • Explain the impact of bankruptcy costs on the value of a firm. • Identify a firm’s optimal capital structure.
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Required Rate of Return on Equity
Capital Costs (%)
Capital costs and the NOI approach in a graphical
representation.
.25
ke = 16.25% and
.20 17.5% respectively
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A Conceptual Look --Relevant Rates of Return
ki = the yield on the company’s debt
I
ki = B =
Annual interest on debt Market value of debt
Assumptions: • Interest paid each and every year • Bond life is infinite • Results in the valuation of a perpetual bond • No taxes (Note: allows us to focus on just capital
• Thus, there is one optimal capital structure where ko is at its lowest point. • This is also the point where the firm’s total value will be the largest (discounting
stock outstanding
Assumptions: • Earnings are not expected to grow • 100% dividend payout • Results in the valuation of a perpetuity • Appropriate in this case for illustrating the
structure issues.)
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A Conceptual Look --Relevant Rates of Return
ke = the expected return on the company’s equity
Earnings available to
ke =
EE SS
= common shareholders Market value of common
K
Ke
Ko Ki
0
V
100% B/V
V
0
a
B/V 100%
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Summary of NI Approach
• Critical assumption is both ki and ke remain constant. • As long as ki and ke are constant, ko is a decreasing linear function of the
“No,” replies Yogi, “Cut it into eight; I’m hungry tonight.”
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The Modigliani-Miller Theorem
• Intuition: the way that a pie is sliced does not effect its size. Equivocally, it is the size of the firm's cash flows and not how these cash flows are diced up that drives firm value.
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Capitalization Rate
Capitalization Rate, ko -- The discount rate used to determine the present value of a stream of expected cash flows.
ko = ki
B B+S
• Optimal Capital Structure -- The capital structure that minimizes the firm’s cost of capital and thereby maximizes the value of the firm.
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Net Income Approach
.15
ቤተ መጻሕፍቲ ባይዱ
.10
.05
ke (Required return on equity) ko (Capitalization rate)
ki (Yield on debt)
0
0 .25 .50 .75 1.0 1.25 1.50 1.75 2.0 Financial Leverage (B / S)
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Summary of NOI Approach
Assumptions: • V = B + S = total market value of the firm • O = I + E = net operating income = interest paid plus
earnings available to common shareholders
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Traditional Approach
• Traditional Approach -- A theory of capital structure in which there exists an optimal capital structure and where management can increase the total value of the firm through the judicious use of financial leverage.
Debt
Equity
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MM Proposition I
Value of firm
Value of firm
Debt 60%
Shares 40%
Shares 60%
Debt 40%
equity.
– Concerned with the effect of capital market decisions on security prices.
– Assume: (1) investment and asset management decisions are held constant and (2) consider only debt-versus-equity financing.