财务管理基础斯坦利布洛克Chapter(10)

Chapter11TheCostofCapitalLecturer:GURenSchoolofEconomicsandCommerce2013.12.9Chapter11-OutlineCostofCapital(COC)CostofDebtCostofPreferredStockCostofCommonEquity:–RetainedEarnings–NewCommonStockWACCOptimumCapitalStructureSouthChinaUniversityofTech.FinancialManagement-Chap11I.Whatisthe“Cost”ofCapital?Howcanthefirmraisecapital?DebtsPreferredStockCommonStockEachoftheseoffersarateofreturntoinvestors.Thisreturnisacosttothefirm.Usuallyafirmhasseveralsourcesoffundsandeachsourcemayhaveadifferentcost.Theoverallcostofthefundsemployedisaproportionateaverageofthevarioussources.SouthChinaUniversityofTech.FinancialManagement-Chap11Whatisthe“Cost”ofCapital?ForInvestors,therateofreturnonasecurityisabenefitofinvesting.ForFinancialManagersthatsamerateofreturnisacostofraisingfundsthatareneededtooperatethefirm.•Inotherwords,thecostofraisingfundsisthefirm’scostofcapital.Thefirm’srequiredrateofreturnthatwillsatisfyallsuppliersofcapitaliscalleditscostofcapital.SouthChinaUniversityofTech.FinancialManagement-Chap11The“cost”ofcapitalisalsoreferredtoasa“hurdle”ratebecausethisistheminimumacceptablerateofreturn.Abusinessfirmmuststrivetoearnatleastasmuchasthecostofthefundsthatituses.Anyinvestmentwhichdoesnotcoverthefirm’scostoffundswillreduceshareholderwealth.The“Cost”ofCapitalisHurdleRateSouthChinaUniversityofTech.FinancialManagement-Chap11II.CostofDebtFortheissuingfirm,thecostofdebtis:therateofreturnrequiredbyinvestorsadjustedforflotationcosts(anycostsassociatedwithissuingnewbonds)adjustedfortaxes.SouthChinaUniversityofTech.FinancialManagement-Chap11II-A.FlotationCosts(P299)Whenacompanysellssecuritiestothepublic,itmustusetheservicesofaninvestmentbanker.Theinvestmentbankerprovidesanumberofservicesforthefirm,including:•Settingthepriceoftheissue,and•SellingtheissuetothepublicThecostoftheseservicesarereferredtoas“flotationcosts”Generally,wedothisbyreducingtheproceedsfromtheissuebytheamountoftheflotationcosts,andrecalculatingthecostofcapital.SouthChinaUniversityofTech.FinancialManagement-Chap11II-B.TaxeffectsoffinancingwithdebtwithstockwithdebtEBIT*400,000400,000-interestexpense0(50,000)EBT400,000350,000-taxes(34%)(136,000)(119,000)EAT264,000231,000•EBIT:earningsbeforeinterestandtax•Taxbenefit:136,000-119,000=17,000SouthChinaUniversityofTech.FinancialManagement-Chap11withstockwithdebtEBIT400,000400,000-interestexpense0(50,000)EBT400,000350,000-taxes(34%)(136,000)(119,000)EAT264,000231,000-dividends(50,000)0Retainedearnings214,000231,000Now,supposethefirmshouldpay$50,000individendstothestockholders.17000SouthChinaUniversityofTech.FinancialManagement-Chap11II-C.CostofDebta.Thebasiccostofdebttothefirmistheeffectiveyieldtomaturity.Theyieldtomaturityforacorporatebondmaybefoundby:)P(0.4+)P(0.6nP-P+I=Ynbbnt′SouthChinaUniversityofTech.FinancialManagement-Chap11Y'=theapproximateyieldtomaturityPb=themarketpriceofthebondIt=theperiodic(annual,monthly,etc.),interestpaymentsPn=theprincipalatmaturityt=theperiodfrom1tonn=thetotalnumberofperiodsEquation(11-1):)P(0.4+)P(0.6nP-P+I=Ynbbnt′SouthChinaUniversityofTech.FinancialManagement-Chap11b.Sinceinterestistaxdeductible,theactualcostofdebttothefirmislessthantheyieldtomaturity.C.Theaftertaxcostofdebtis:Theaftertaxcosttoafirmofbondsissuedatparpaying$100annuallyininterestwouldbe7.05percentifthefirm'smarginaltaxratewere35percent.%05.7)35.1%(84.10)1(=−=−=TYKdSouthChinaUniversityofTech.FinancialManagement-Chap11Important:After-taxbasisandmarketpricebasisThecostofpreferredstockandcommonstockiscalculatedonanafter-taxbasis,thecostofdebtisadjustedfortaxessothatallthreesourcesofcapitalareonanafter-taxcostbasis.Priceofdebt,preferredstock,commonstockandfirmvalueareallmarketvalues.SouthChinaUniversityofTech.FinancialManagement-Chap11Example:CostofDebtPrescottCorporationissuesa$1,000par,20yearbondpayingthemarketrateof10%.Couponsareannual.Thebondwillsellforparsinceitpaysthemarketrate,butflotationcostsamountto$50perbond.Whatisthepre-taxandafter-taxcostofdebtforPrescottCorporation?Marginaltaxrate:34%SouthChinaUniversityofTech.FinancialManagement-Chap11Pre-taxcostofdebt:nnntttbYPYIP)1()1(1+++=∑=Pb=1000-50=950,It=1000×10％＝100,Pn＝1000,n=20Y=?usingthecalculator,Y=10.6%.After-taxcostofdebt:Kd=Y(1-T)=10.6%(1-.34)=7%So,a10%bondcoststhefirmonly7%(withflotationcosts)sincetheinterestistaxdeductible.SouthChinaUniversityofTech.FinancialManagement-Chap11III.TheCostofPreferredStockA.Preferredstockissimilartodebtinthatthepreferreddividendisfixedbutdissimilarinthatdividendsarenottaxdeductible.B.Thecostofpreferredstocktoafirmmaybedeterminedby:examiningtherelationshipofitsannual(usuallyfixed)dividendanditsmarketdeterminedprice.Preferredstock,unlikedebt,hasnomaturityandthereforethedividendsareexpectedtobeperpetual.SouthChinaUniversityofTech.FinancialManagement-Chap11C.Thecostofpreferredstock(Kp)iscomputedbydividingtheannualdividendpaymentbythenetproceedsreceivedbythefirminthesaleofpreferredstock.Kp=costofpreferredstockD=preferredstockdividendF=flotationcostspershareP=marketpriceofpreferredstockF)(P-D=KpSouthChinaUni