财务管理基础 答案 沈艺峰 沈洪涛im09The Cost of Capital.docx

1、财务管理基础 答案 沈艺峰 沈洪涛im09 The Cost of CapitalChapter 9The Cost of CapitalLEARNING OBJECTIVESAfter reading this chapter, students should be able to: Explain what is meant by a firms weighted average cost of capital. Define and calculate the component costs of debt and preferred stock. Explain why retaine

2、d earnings are not free and use three approaches to estimate the component cost of retained earnings. Briefly explain why the cost of new common equity is higher than the cost of retained earnings, calculate the cost of new common equity, and calculate the retained earnings breakpoint-which is the p

3、oint where new common equity would have to be issued. Briefly explain the two alternative approaches that can be used to account for flotation costs. Calculate the firms composite, or weighted average, cost of capital. Identify some of the factors that affect the overall, composite cost of capital.

4、Briefly explain how firms should evaluate projects with different risks, and the problems encountered when divisions within the same firm all use the firms composite WACC when considering capital budgeting projects. List and briefly explain the three separate and distinct types of risk that can be i

5、dentified, and explain the procedure many firms use when developing subjective risk-adjusted costs of capital. List some problem areas in estimating the cost of capital.LECTURE SUGGESTIONSChapter 9 uses the rate of return concepts covered in previous chapters, along with the concept of the weighted

6、average cost of capital (WACC), to develop a corporate cost of capital for use in capital budgeting.We begin by describing the logic of the WACC, and why it should be used in capital budgeting. We next explain how to estimate the cost of each component of capital, and how to put the components toget

7、her to determine the WACC. We go on to discuss factors that affect the WACC, how to adjust the cost of capital for risk, and estimating project risk. We conclude the chapter with a discussion on some problem areas in the cost of capital.The details of what we cover, and the way we cover it, can be s

8、een by scanning Blueprints, Chapter 9. For other suggestions about the lecture, please see the “Lecture Suggestions” in Chapter 2, where we describe how we conduct our classes. DAYS ON CHAPTER: 3 OF 58 DAYS (50-minute periods)ANSWERS TO END-OF-CHAPTER QUESTIONS9-1 Probable Effect on kd(1 - T) ks WAC

9、Ca. The corporate tax rate is lowered. + 0 + b. The Federal Reserve tightens credit. + + + c. The firm uses more debt; that is, it increases its debt/assets ratio. + + 0 d. The dividend payout ratio is increased. 0 0 0 e. The firm doubles the amount of capital it raises during the year. 0 or + 0 or

10、+ 0 or + f. The firm expands into a risky new area. + + + g. The firm merges with another firm whose earnings are counter-cyclicalboth to those of the first firm andto the stock market. - - - h. The stock market falls drastically, and the firms stock falls along with the rest. 0 + + i. Investors bec

11、ome more risk averse. + + + j. The firm is an electric utility with a large investment in nuclear plants.Several states propose a ban on nuclear power generation. + + + 9-2 Beta (market) risk refers to the projects effect on the corporate beta coefficient. Within-firm (corporate) risk refers to the

12、projects effect on the stability of the firms earnings. Stand-alone risk refers to the inherent riskiness of the projects expected returns when viewed alone. Theoretically, beta (market) risk is the most relevant measure because of its effect on stock prices.9-3 The cost of capital for average-risk

13、projects would be the firms cost of capital, 10 percent. A somewhat higher cost would be used for more risky projects, and a lower cost would be used for less risky ones. For example, we might use 12 percent for more risky projects and 9 percent for less risky projects. These choices are arbitrary.9

14、-4 Each firm has an optimal capital structure, defined as that mix of debt, preferred, and common equity that causes its stock price to be maximized. A value-maximizing firm will determine its optimal capital structure, use it as a target, and then raise new capital in a manner designed to keep the

15、actual capital structure on target over time. The target proportions of debt, preferred stock, and common equity, along with the costs of those components, are used to calculate the firms weighted average cost of capital, WACC. The weights could be based either on the accounting values shown on the

16、firms balance sheet (book values) or on the market values of the different securities. Theoretically, the weights should be based on market values, but if a firms book value weights are reasonably close to its market value weights, book value weights can be used as a proxy for market value weights.

17、Consequently, target market value weights should be used in the WACC equation.9-5 An increase in the risk-free rate will increase the cost of debt. Remember from Chapter 4, k = kRF + DRP + LP + MRP. Thus, if kRF increases so does k (the cost of debt). Similarly, if the risk-free rate increases so do

18、es the cost of equity. From the CAPM equation, ks = kRF + (kM kRF)b. Consequently, if kRF increases ks will increase too.9-6 In general, failing to adjust for differences in risk would lead the firm to accept too many risky projects and reject too many safe ones. Over time, the firm would become mor

19、e risky, its WACC would increase, and its shareholder value would suffer.SOLUTIONS TO END-OF-CHAPTER PROBLEMS9-1 40% Debt; 60% Equity; kd = 9%; T = 40%; WACC = 9.96%; ks = ? WACC = (wd)(kd)(1 - T) + (wc)(ks)0.0996 = (0.4)(0.09)(1 - 0.4) + (0.6)ks0.0996 = 0.0216 + 0.6ks 0.078 = 0.6ks ks = 13%.9-2 Pp

20、= $47.50; Dp = $3.80; kp = ?kp = kp = = 8%.9-3 P0 = $30; D1 = $3.00; g = 5%; F = 10%; ks = ?; ke = ?ks = + g = + 0.05 = 15%.ke = + g = + 0.05 = + 0.05 = 16.11%.9-4 Projects A, B, C, D, and E would be accepted since each projects return is greater than the firms WACC.9-5 kd(1 - T) = 0.12(0.65) = 7.80

21、%.9-6 kp = = = 11.94%.9-7 a. ks = + gks = ks = 14.83%.b. F = ($36.00 - $32.40)/$36.00 = $3.60/$36.00 = 10%.c. ke = D1/P0(1 - F) + g = $3.18/$32.40 + 6% = 9.81% + 6% = 15.81%.9-8 Capital Sources Amount Capital Structure WeightLong-term debt $1,152 40.0%Equity 1,728 60.0 $2,880 100.0%WACC = wdkd(1 - T

22、) + wcks = 0.4(0.13)(0.6) + 0.6(0.16) = 0.0312 + 0.0960 = 12.72%.9-9 ks = D1/P0 + g = $2(1.07)/$24.75 + 7% = 8.65% + 7% = 15.65%.WACC = wd(kd)(1 - T) + wc(ks); wc = 1 - wd.13.95% = wd(11%)(1 - 0.35) + (1 - wd)(15.65%)0.1395 = 0.0715wd + 0.1565 - 0.1565wd-0.017 = -0.085wd wd = 0.20 = 20%.9-10 a. kd =

23、 10%, kd(1 - T) = 10%(0.6) = 6%.D/A = 45%; D0 = $2; g = 4%; P0 = $20; T = 40%.Project A: Rate of return = 13%.Project B: Rate of return = 10%.ks = $2(1.04)/$20 + 4% = 14.40%.b. WACC = 0.45(6%) + 0.55(14.40%) = 10.62%.c. Since the firms WACC is 10.62% and each of the projects is equally risky and as

24、risky as the firms other assets, MEC should accept Project A. Its rate of return is greater than the firms WACC. Project B should not be accepted, since its rate of return is less than MECs WACC.9-11 Debt = 40%, Equity = 60%.P0 = $22.50, D0 = $2.00, D1 = $2.00(1.07) = $2.14, g = 7%.ks = + g = + 7% =

25、 16.51%.WACC = (0.4)(0.12)(1 - 0.4) + (0.6)(0.1651) = 0.0288 + 0.0991 = 12.79%.9-12 If the firms dividend yield is 5% and its stock price is $46.75, the next expected annual dividend can be computed.Dividend yield = D1/P0 5% = D1/$46.75 D1 = $2.3375.Next, the firms cost of new common stock can be de

26、termined from the DCF approach for the cost of equity.ke = D1/P0(1 - F) + gke = $2.3375/$46.75(1 - 0.05) + 0.12ke = 17.26%.9-13 a. Examining the DCF approach to the cost of retained earnings, the expected growth rate can be determined from the cost of common equity, price, and expected dividend. How

27、ever, first, this problem requires that the formula for WACC be used to determine the cost of common equity. WACC = wd(kd)(1 - T) + wc(ks)13.0% = 0.4(10%)(1 - 0.4) + 0.6(ks)10.6% = 0.6ks ks = 0.17667 or 17.67%.From the cost of common equity, the expected growth rate can now be determined. ks = D1/P0

28、 + g0.17667 = $3/$35 + g g = 0.090952 or 9.10%.b. From the formula for the long-run growth rate:g = (1 - Div. payout ratio) ROE = (1 - Div. payout ratio) (NI/Equity)0.090952 = (1 - Div. payout ratio) ($1,100 million/$6,000 million)0.090952 = (1 Div. payout ratio) 0.18333330.496104 = (1 Div. payout r

29、atio)Div. payout ratio = 0.503896 or 50.39%.9-14 If the investment requires $5.9 million, that means that it requires $3.54 million (60%) of equity capital and $2.36 million (40%) of debt capital. In this scenario, the firm would exhaust its $2 million of retained earnings and be forced to raise new

30、 stock at a cost of 15%. Needing $2.36 million in debt capital, the firm could get by raising debt at only 10%. Therefore, its weighted average cost of capital is: WACC = 0.4(10%)(1 - 0.4) + 0.6(15%) = 11.4%.9-15 a. If all project decisions are independent, the firm should accept all projects whose

31、returns exceed their risk-adjusted costs of capital. The appropriate costs of capital are summarized below: Required Rate of Cost ofProject Investment Return Capital A $4 million 14.0% 12% B $5 million 11.5 12 C $3 million 9.5 8 D $2 million 9.0 10 E $6 million 12.5 12 F $5 million 12.5 10 G $6 million 7.0 8 H $3 million 11.5 8Therefore, Ziege should accept projects A, C, E, F, and H.b. With only $13 million to invest in its capital budget, Ziege must choose the best combination of Projects A, C, E, F, and H. Collectively, the projects wou