财务管理英文Chapter15.pptVIP

Chapter 15 Required Returns and the Cost of Capital Chapter Objectives Estimate values for the costs of debt and preference shares. Calculate the WACC. Apply the dividend growth model approach and the SML approach to determine the cost of equity. Discuss alternative approaches to estimating a required rate. Discuss the effects of flotation costs on WACC and the NPV of a project. The Cost of Capital Vocabulary - the following all mean the same thing: required return appropriate discount rate cost of capital 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). The Cost of Capital When we say a firm has a “cost of capital” of, for example, 12%, we are saying: The firm can only have a positive NPV on a project it return exceeds 12%. The firm must earn 12% just to compensate investors for the use of their capital in a project. The use of capital in a project must earn 12% or more, not that it will necessarily cost 12% to borrow funds for the project. Thus cost of capital depends primarily on the USE of funds, not the SOURCE of funds. Market Value of Long-Term Financing The assumption is made that firm’s capital structure is fixed - a firm’s cost of capital then reflects both cost of debt and cost of equity. Type of Financing Mkt Val Weight Long-Term Debt $ 35M 35% Preferred Stock $ 15M 15% Common Stock Equity $ 50M 50% $ 100M 100% Cost of Debt Cost of Debt is the required rate of return on investment of the lenders of a company. Adjustment to Cost of Debt Subtract Taxes from the interest of the bond and recalculate yield figures. A B Invest. 1000 1000 EBIT 200 200 -IE 0 50 EBT 200 150 50×（1-33%） -Taxes（T=33%） 66 - 49.5