Enviar pesquisa
Carregar
9. cost of capital
•
Transferir como PPT, PDF
•
8 gostaram
•
8,366 visualizações
AfiqEfendy Zaen
Seguir
Economia e finanças
Denunciar
Compartilhar
Denunciar
Compartilhar
1 de 41
Baixar agora
Recomendados
8. stock valuation
8. stock valuation
AfiqEfendy Zaen
Financial Management Slides Ch 16
Financial Management Slides Ch 16
Sayyed Naveed Ali
Ch11 - The Cost of Capital
Ch11 - The Cost of Capital
Mentari Pagi
Chapter 7
Chapter 7
Sumaia Qaderi
6. bond valuation
6. bond valuation
AfiqEfendy Zaen
ch.1 The role of finance management
ch.1 The role of finance management
Dasrat goswami
Cost Of Capital
Cost Of Capital
elvieentero
Chapter 03_What Do Interest Rates Mean and What Is Their Role in Valuation?
Chapter 03_What Do Interest Rates Mean and What Is Their Role in Valuation?
Rusman Mukhlis
Recomendados
8. stock valuation
8. stock valuation
AfiqEfendy Zaen
Financial Management Slides Ch 16
Financial Management Slides Ch 16
Sayyed Naveed Ali
Ch11 - The Cost of Capital
Ch11 - The Cost of Capital
Mentari Pagi
Chapter 7
Chapter 7
Sumaia Qaderi
6. bond valuation
6. bond valuation
AfiqEfendy Zaen
ch.1 The role of finance management
ch.1 The role of finance management
Dasrat goswami
Cost Of Capital
Cost Of Capital
elvieentero
Chapter 03_What Do Interest Rates Mean and What Is Their Role in Valuation?
Chapter 03_What Do Interest Rates Mean and What Is Their Role in Valuation?
Rusman Mukhlis
Stock Valuation
Stock Valuation
Harish Lunani
Chapter 8 risk and return
Chapter 8 risk and return
Chang Keng Kai Kent
Chapter 12 Cost Of Capital
Chapter 12 Cost Of Capital
Alamgir Alwani
Chapter 13 Capital Structure And Leverage
Chapter 13 Capital Structure And Leverage
Alamgir Alwani
Financial Management Slides Ch 15
Financial Management Slides Ch 15
Sayyed Naveed Ali
Van Horn Chapter 2.ppt
Van Horn Chapter 2.ppt
ZSMusic
Investment management chapter 5 the arbitrage pricing theory
Investment management chapter 5 the arbitrage pricing theory
Heng Leangpheng
Valuing stocks and assesing risk ch.7 (uts)
Valuing stocks and assesing risk ch.7 (uts)
Rika Hernawati
4. ch 6 financial statement analysis
4. ch 6 financial statement analysis
irfan_1
Measures of Cost of Capital
Measures of Cost of Capital
Kaminee Iresha
Stock valuation
Stock valuation
ASAD ALI
Financial Management Slides Ch 05
Financial Management Slides Ch 05
Sayyed Naveed Ali
GITMAN Chapter 2 Financial Statement Analysis
GITMAN Chapter 2 Financial Statement Analysis
Mikee Bylss
Stock offerings and monitoring investo r 6
Stock offerings and monitoring investo r 6
Rika Hernawati
9780273713654 pp11
9780273713654 pp11
Dasrat goswami
BONDS, BOND VALUATION, AND INTEREST RATES
BONDS, BOND VALUATION, AND INTEREST RATES
Salah A. Skaik - MBA-PMP®
Capital structure theory
Capital structure theory
kitturashmikittu
Duration and Convexity
Duration and Convexity
Mario Dell'Era
Bond valuation
Bond valuation
Babasab Patil
Dividend policy
Dividend policy
bushrashahzad2
FIN Chapter 9.ppt
FIN Chapter 9.ppt
ssuserbea996
Bba 2204 fin mgt week 9 cost of capital
Bba 2204 fin mgt week 9 cost of capital
Stephen Ong
Mais conteúdo relacionado
Mais procurados
Stock Valuation
Stock Valuation
Harish Lunani
Chapter 8 risk and return
Chapter 8 risk and return
Chang Keng Kai Kent
Chapter 12 Cost Of Capital
Chapter 12 Cost Of Capital
Alamgir Alwani
Chapter 13 Capital Structure And Leverage
Chapter 13 Capital Structure And Leverage
Alamgir Alwani
Financial Management Slides Ch 15
Financial Management Slides Ch 15
Sayyed Naveed Ali
Van Horn Chapter 2.ppt
Van Horn Chapter 2.ppt
ZSMusic
Investment management chapter 5 the arbitrage pricing theory
Investment management chapter 5 the arbitrage pricing theory
Heng Leangpheng
Valuing stocks and assesing risk ch.7 (uts)
Valuing stocks and assesing risk ch.7 (uts)
Rika Hernawati
4. ch 6 financial statement analysis
4. ch 6 financial statement analysis
irfan_1
Measures of Cost of Capital
Measures of Cost of Capital
Kaminee Iresha
Stock valuation
Stock valuation
ASAD ALI
Financial Management Slides Ch 05
Financial Management Slides Ch 05
Sayyed Naveed Ali
GITMAN Chapter 2 Financial Statement Analysis
GITMAN Chapter 2 Financial Statement Analysis
Mikee Bylss
Stock offerings and monitoring investo r 6
Stock offerings and monitoring investo r 6
Rika Hernawati
9780273713654 pp11
9780273713654 pp11
Dasrat goswami
BONDS, BOND VALUATION, AND INTEREST RATES
BONDS, BOND VALUATION, AND INTEREST RATES
Salah A. Skaik - MBA-PMP®
Capital structure theory
Capital structure theory
kitturashmikittu
Duration and Convexity
Duration and Convexity
Mario Dell'Era
Bond valuation
Bond valuation
Babasab Patil
Dividend policy
Dividend policy
bushrashahzad2
Mais procurados
(20)
Stock Valuation
Stock Valuation
Chapter 8 risk and return
Chapter 8 risk and return
Chapter 12 Cost Of Capital
Chapter 12 Cost Of Capital
Chapter 13 Capital Structure And Leverage
Chapter 13 Capital Structure And Leverage
Financial Management Slides Ch 15
Financial Management Slides Ch 15
Van Horn Chapter 2.ppt
Van Horn Chapter 2.ppt
Investment management chapter 5 the arbitrage pricing theory
Investment management chapter 5 the arbitrage pricing theory
Valuing stocks and assesing risk ch.7 (uts)
Valuing stocks and assesing risk ch.7 (uts)
4. ch 6 financial statement analysis
4. ch 6 financial statement analysis
Measures of Cost of Capital
Measures of Cost of Capital
Stock valuation
Stock valuation
Financial Management Slides Ch 05
Financial Management Slides Ch 05
GITMAN Chapter 2 Financial Statement Analysis
GITMAN Chapter 2 Financial Statement Analysis
Stock offerings and monitoring investo r 6
Stock offerings and monitoring investo r 6
9780273713654 pp11
9780273713654 pp11
BONDS, BOND VALUATION, AND INTEREST RATES
BONDS, BOND VALUATION, AND INTEREST RATES
Capital structure theory
Capital structure theory
Duration and Convexity
Duration and Convexity
Bond valuation
Bond valuation
Dividend policy
Dividend policy
Semelhante a 9. cost of capital
FIN Chapter 9.ppt
FIN Chapter 9.ppt
ssuserbea996
Bba 2204 fin mgt week 9 cost of capital
Bba 2204 fin mgt week 9 cost of capital
Stephen Ong
WACC.ppt
WACC.ppt
salmansaleem920
cost of capital with examples -weighted average
cost of capital with examples -weighted average
Sekhara4
4464-Chapter-08 (1).ppt
4464-Chapter-08 (1).ppt
biruktesfaye27
Costofcapital 100114234212-phpapp02
Costofcapital 100114234212-phpapp02
yaser_alakhras
Cost of Capital.ppt
Cost of Capital.ppt
Prakhar261150
COST of CAPITAL SLIDE Semester 2 2020-2021 part 1.ppt
COST of CAPITAL SLIDE Semester 2 2020-2021 part 1.ppt
mishJOHN1
Cost of capital
Cost of capital
Ministry of Public Administration and Home Affairs
Ch. 6ed Cost of Capital.ppt.ppt
Ch. 6ed Cost of Capital.ppt.ppt
HudaElMaghraby1
Cost of capital
Cost of capital
shagun jain
Chapter 7 an introduction to risk and return
Chapter 7 an introduction to risk and return
Chang Keng Kai Kent
Session 3 and 4 cost of capital
Session 3 and 4 cost of capital
Sudha Agarwal
Cost of capital ppt @ bec doms on finance
Cost of capital ppt @ bec doms on finance
Babasab Patil
3- Cost of Capital-update.pptx
3- Cost of Capital-update.pptx
MohamedKamal236980
Fm chapter 8
Fm chapter 8
Le Ha
Cost of capital
Cost of capital
Shivangi Sinha
Revision materials cf mba wic
Revision materials cf mba wic
Arathy Krishna
1b.leverage decision
1b.leverage decision
Nupur Bajoria
Unit 3 Cost of capital JNTUA Syllabus_Financial Management
Unit 3 Cost of capital JNTUA Syllabus_Financial Management
Shaik Mohammad Imran
Semelhante a 9. cost of capital
(20)
FIN Chapter 9.ppt
FIN Chapter 9.ppt
Bba 2204 fin mgt week 9 cost of capital
Bba 2204 fin mgt week 9 cost of capital
WACC.ppt
WACC.ppt
cost of capital with examples -weighted average
cost of capital with examples -weighted average
4464-Chapter-08 (1).ppt
4464-Chapter-08 (1).ppt
Costofcapital 100114234212-phpapp02
Costofcapital 100114234212-phpapp02
Cost of Capital.ppt
Cost of Capital.ppt
COST of CAPITAL SLIDE Semester 2 2020-2021 part 1.ppt
COST of CAPITAL SLIDE Semester 2 2020-2021 part 1.ppt
Cost of capital
Cost of capital
Ch. 6ed Cost of Capital.ppt.ppt
Ch. 6ed Cost of Capital.ppt.ppt
Cost of capital
Cost of capital
Chapter 7 an introduction to risk and return
Chapter 7 an introduction to risk and return
Session 3 and 4 cost of capital
Session 3 and 4 cost of capital
Cost of capital ppt @ bec doms on finance
Cost of capital ppt @ bec doms on finance
3- Cost of Capital-update.pptx
3- Cost of Capital-update.pptx
Fm chapter 8
Fm chapter 8
Cost of capital
Cost of capital
Revision materials cf mba wic
Revision materials cf mba wic
1b.leverage decision
1b.leverage decision
Unit 3 Cost of capital JNTUA Syllabus_Financial Management
Unit 3 Cost of capital JNTUA Syllabus_Financial Management
Mais de AfiqEfendy Zaen
Network Security Chapter 7
Network Security Chapter 7
AfiqEfendy Zaen
OS Database Security Chapter 6
OS Database Security Chapter 6
AfiqEfendy Zaen
Virus and Malicious Code Chapter 5
Virus and Malicious Code Chapter 5
AfiqEfendy Zaen
Protocols and Practices in Using Encryption Chapter 4
Protocols and Practices in Using Encryption Chapter 4
AfiqEfendy Zaen
Secure Encyrption Systems Chapter 2
Secure Encyrption Systems Chapter 2
AfiqEfendy Zaen
Basic Encryption Decryption Chapter 2
Basic Encryption Decryption Chapter 2
AfiqEfendy Zaen
Basic Security Chapter 1
Basic Security Chapter 1
AfiqEfendy Zaen
10. cash flow in capital budgeting
10. cash flow in capital budgeting
AfiqEfendy Zaen
10. short term financial planning
10. short term financial planning
AfiqEfendy Zaen
6. risk return
6. risk return
AfiqEfendy Zaen
4. time value of money
4. time value of money
AfiqEfendy Zaen
3 financial ratio
3 financial ratio
AfiqEfendy Zaen
2. financial statement cash flow
2. financial statement cash flow
AfiqEfendy Zaen
1. chapter 1 introduction of Finance
1. chapter 1 introduction of Finance
AfiqEfendy Zaen
Mais de AfiqEfendy Zaen
(14)
Network Security Chapter 7
Network Security Chapter 7
OS Database Security Chapter 6
OS Database Security Chapter 6
Virus and Malicious Code Chapter 5
Virus and Malicious Code Chapter 5
Protocols and Practices in Using Encryption Chapter 4
Protocols and Practices in Using Encryption Chapter 4
Secure Encyrption Systems Chapter 2
Secure Encyrption Systems Chapter 2
Basic Encryption Decryption Chapter 2
Basic Encryption Decryption Chapter 2
Basic Security Chapter 1
Basic Security Chapter 1
10. cash flow in capital budgeting
10. cash flow in capital budgeting
10. short term financial planning
10. short term financial planning
6. risk return
6. risk return
4. time value of money
4. time value of money
3 financial ratio
3 financial ratio
2. financial statement cash flow
2. financial statement cash flow
1. chapter 1 introduction of Finance
1. chapter 1 introduction of Finance
Último
Call Girls Near Golden Tulip Essential Hotel, New Delhi 9873777170
Call Girls Near Golden Tulip Essential Hotel, New Delhi 9873777170
Sonam Pathan
The Triple Threat | Article on Global Resession | Harsh Kumar
The Triple Threat | Article on Global Resession | Harsh Kumar
Harsh Kumar
(中央兰开夏大学毕业证学位证成绩单-案例)
(中央兰开夏大学毕业证学位证成绩单-案例)
twfkn8xj
Economic Risk Factor Update: April 2024 [SlideShare]
Economic Risk Factor Update: April 2024 [SlideShare]
Commonwealth
原版1:1复刻堪萨斯大学毕业证KU毕业证留信学历认证
原版1:1复刻堪萨斯大学毕业证KU毕业证留信学历认证
jdkhjh
Classical Theory of Macroeconomics by Adam Smith
Classical Theory of Macroeconomics by Adam Smith
AdamYassin2
Stock Market Brief Deck for 4/24/24 .pdf
Stock Market Brief Deck for 4/24/24 .pdf
Michael Silva
Governor Olli Rehn: Dialling back monetary restraint
Governor Olli Rehn: Dialling back monetary restraint
Suomen Pankki
SBP-Market-Operations and market managment
SBP-Market-Operations and market managment
factical
How Automation is Driving Efficiency Through the Last Mile of Reporting
How Automation is Driving Efficiency Through the Last Mile of Reporting
Aggregage
NO1 WorldWide online istikhara for love marriage vashikaran specialist love p...
NO1 WorldWide online istikhara for love marriage vashikaran specialist love p...
Amil Baba Dawood bangali
Call Girls Near Me WhatsApp:+91-9833363713
Call Girls Near Me WhatsApp:+91-9833363713
Sonam Pathan
(办理学位证)加拿大萨省大学毕业证成绩单原版一比一
(办理学位证)加拿大萨省大学毕业证成绩单原版一比一
S SDS
fca-bsps-decision-letter-redacted (1).pdf
fca-bsps-decision-letter-redacted (1).pdf
Henry Tapper
NO1 Certified Ilam kala Jadu Specialist Expert In Bahawalpur, Sargodha, Sialk...
NO1 Certified Ilam kala Jadu Specialist Expert In Bahawalpur, Sargodha, Sialk...
Amil Baba Dawood bangali
Authentic No 1 Amil Baba In Pakistan Authentic No 1 Amil Baba In Karachi No 1...
Authentic No 1 Amil Baba In Pakistan Authentic No 1 Amil Baba In Karachi No 1...
First NO1 World Amil baba in Faisalabad
Stock Market Brief Deck for "this does not happen often".pdf
Stock Market Brief Deck for "this does not happen often".pdf
Michael Silva
NO1 WorldWide Genuine vashikaran specialist Vashikaran baba near Lahore Vashi...
NO1 WorldWide Genuine vashikaran specialist Vashikaran baba near Lahore Vashi...
Amil baba
212MTAMount Durham University Bachelor's Diploma in Technology
212MTAMount Durham University Bachelor's Diploma in Technology
z xss
Ch 4 investment Intermediate financial Accounting
Ch 4 investment Intermediate financial Accounting
Abdi118682
Último
(20)
Call Girls Near Golden Tulip Essential Hotel, New Delhi 9873777170
Call Girls Near Golden Tulip Essential Hotel, New Delhi 9873777170
The Triple Threat | Article on Global Resession | Harsh Kumar
The Triple Threat | Article on Global Resession | Harsh Kumar
(中央兰开夏大学毕业证学位证成绩单-案例)
(中央兰开夏大学毕业证学位证成绩单-案例)
Economic Risk Factor Update: April 2024 [SlideShare]
Economic Risk Factor Update: April 2024 [SlideShare]
原版1:1复刻堪萨斯大学毕业证KU毕业证留信学历认证
原版1:1复刻堪萨斯大学毕业证KU毕业证留信学历认证
Classical Theory of Macroeconomics by Adam Smith
Classical Theory of Macroeconomics by Adam Smith
Stock Market Brief Deck for 4/24/24 .pdf
Stock Market Brief Deck for 4/24/24 .pdf
Governor Olli Rehn: Dialling back monetary restraint
Governor Olli Rehn: Dialling back monetary restraint
SBP-Market-Operations and market managment
SBP-Market-Operations and market managment
How Automation is Driving Efficiency Through the Last Mile of Reporting
How Automation is Driving Efficiency Through the Last Mile of Reporting
NO1 WorldWide online istikhara for love marriage vashikaran specialist love p...
NO1 WorldWide online istikhara for love marriage vashikaran specialist love p...
Call Girls Near Me WhatsApp:+91-9833363713
Call Girls Near Me WhatsApp:+91-9833363713
(办理学位证)加拿大萨省大学毕业证成绩单原版一比一
(办理学位证)加拿大萨省大学毕业证成绩单原版一比一
fca-bsps-decision-letter-redacted (1).pdf
fca-bsps-decision-letter-redacted (1).pdf
NO1 Certified Ilam kala Jadu Specialist Expert In Bahawalpur, Sargodha, Sialk...
NO1 Certified Ilam kala Jadu Specialist Expert In Bahawalpur, Sargodha, Sialk...
Authentic No 1 Amil Baba In Pakistan Authentic No 1 Amil Baba In Karachi No 1...
Authentic No 1 Amil Baba In Pakistan Authentic No 1 Amil Baba In Karachi No 1...
Stock Market Brief Deck for "this does not happen often".pdf
Stock Market Brief Deck for "this does not happen often".pdf
NO1 WorldWide Genuine vashikaran specialist Vashikaran baba near Lahore Vashi...
NO1 WorldWide Genuine vashikaran specialist Vashikaran baba near Lahore Vashi...
212MTAMount Durham University Bachelor's Diploma in Technology
212MTAMount Durham University Bachelor's Diploma in Technology
Ch 4 investment Intermediate financial Accounting
Ch 4 investment Intermediate financial Accounting
9. cost of capital
1.
Chapter 9 Cost of
Capital Copyright © 2011 Pearson Prentice Hall. All rights reserved.
2.
Learning Objectives
1. Describe the concepts underlying the firm’s cost of capital. 2. Calculate the after-tax cost of debt, preferred stock, and common equity. 3. Calculate a firm’s weighted average cost of capital. 4. Describe the procedure used by PepsiCo to estimate the cost of capital for a multidivisional firm. 5. Use the cost of capital to evaluate new investment opportunities. 6. Calculate equivalent interest rates for different countries. © 2011 Pearson Prentice Hall. All rights reserved. 9-2
3.
Slide Contents
Cost of Capital: Key Definitions and Concepts Determining the Cost of Individual Sources of Capital The Weighted Average Cost of Capital Calculating Divisional Costs of Capital for PepsiCo, Inc. Cost of Capital and New Investment Shareholder Value-Based Management Multinational Firms and Interest Rates © 2011 Pearson Prentice Hall. All rights reserved. 9-3
4.
1. Cost of
Capital: Key Definitions and Concepts Capital Capital represents the funds used to finance a firm's assets and operations. Capital constitutes all items on the right hand side of balance sheet i.e. liabilities and common equity. Main sources: Debt, Preferred stock, Retained earnings and Common Stock © 2011 Pearson Prentice Hall. All rights reserved. 9-4
5.
Investor’s Required
Rate of Return Investor’s Required Rate of Return – is the minimum rate of return necessary to attract an investor to purchase or hold a security. Investor’s required rate of return is not the same as cost of capital due to taxes and transaction costs. Impact of taxes: For example, a firm may pay 8% interest on debt but due to tax benefit on interest expense, the net cost to the firm will be lower than 8%. © 2011 Pearson Prentice Hall. All rights reserved. 9-5
6.
Investor’s Required
Rate of Return Impact of transaction costs on cost of capital: For example, If a firm sells new stock for $50.00 a share and incurs $5 in flotation costs, and the investors have a required rate of return of 15%, what is the cost of capital? The firm has only $45.00 to invest after transaction cost. .15 × $50.00 = $7.5 k = $7.5/($45.00) = .1667 or 16.67% (rather than 15%) © 2011 Pearson Prentice Hall. All rights reserved. 9-6
7.
Financial Policy
A firm’s financial policy indicates the desired sources of financing and the particular mix in which it will be used. For example, a firm may choose to raise capital by issuing stocks and bonds in the ratio of 6:4 (60% stocks and 40% bonds). The choice of mix may impact the cost of capital. © 2011 Pearson Prentice Hall. All rights reserved. 9-7
8.
2. Determining the
Costs of the Individual Sources of Capital The Cost of Debt The bondholder’s required rate of return on debt is the return that bondholders demand. As seen in Chapter 7, this can be estimated using the bond price equation: © 2011 Pearson Prentice Hall. All rights reserved. 9-8
9.
The Cost of
Debt Since firms must pay floatation costs when they sell bonds, the net proceeds per bond received by firm is less than the market price of the bond. Hence, the cost of debt capital (Kd) will be higher than the bondholder’s required rate of return. It can be calculated using the following equation: © 2011 Pearson Prentice Hall. All rights reserved. 9-9
10.
The Cost of
Debt See Example 9-1 Investor’s required rate of return = 9% However, due to floatation cost, the before- tax cost of capital for the firm is = 9.73% After-tax cost of debt = Cost of debt*(1-tax rate) At 34% tax bracket = 9.73*(1 – .34) = 6.422% © 2011 Pearson Prentice Hall. All rights reserved. 9-10
11.
The Cost of
Preferred Stock Similar to bond issue, since floatation costs are incurred, preferred stockholder’s required rate of return will be less than the cost of preferred capital to the firm. Thus, in order to determine the cost of preferred stock, we adjust the price of preferred stock for floatation cost to give us the net proceeds. Net proceeds = issue price per share – floatation cost per share. © 2011 Pearson Prentice Hall. All rights reserved. 9-11
12.
The Cost of
Preferred Stock Cost of Preferred Stock: Pn = net proceeds (i.e. Issue price – Floatation costs) Dp = Preferred stock dividend per share Example: Determine the cost for a preferred stock that pays annual dividend of $4.25, has current stock price $58.50 and incurs flotation costs of $1.375 per share Cost = $4.25/(58.50 – 1.375) = .074 or 7.44% © 2011 Pearson Prentice Hall. All rights reserved. 9-12
13.
The Cost of
Common Equity Cost of equity is more challenging to estimate than the cost of debt or the cost of preferred stock because common stockholder’s rate of return is not fixed as there is no stated coupon rate or dividend. Furthermore, the costs will vary for two sources of equity (i.e. retained earnings and new issue). © 2011 Pearson Prentice Hall. All rights reserved. 9-13
14.
The Cost of
Common Equity There is no flotation costs on retained earnings but the firm incurs costs when it sells new common stock. Note retained earnings are not a free source of capital. There is an opportunity cost. © 2011 Pearson Prentice Hall. All rights reserved. 9-14
15.
Cost estimation techniques
Two commonly used methods for estimating common stockholder’s required rate of return are: The Dividend Growth Model The Capital Asset Pricing Model © 2011 Pearson Prentice Hall. All rights reserved. 9-15
16.
The Dividend Growth
Model Investors’ required rate of return (For Retained Earnings): D1 = Dividends expected one year hence Pcs = Price of common stock; g = growth rate © 2011 Pearson Prentice Hall. All rights reserved. 9-16
17.
The Dividend Growth
Model Investors’ required rate of return (For new issues) D1 = Dividends expected one year hence Pcs = Net proceeds per share g = growth rate © 2011 Pearson Prentice Hall. All rights reserved. 9-17
18.
The Dividend Growth
Model Example: A company expects dividends this year to be $1.10, based upon the fact that $1 were paid last year. The firm expects dividends to grow 10% next year and into the foreseeable future. Stock is trading at $35 a share. Cost of retained earnings: Kcs = D1/Pcs + g 1.1/35 + .10 = .1314 or 13.14% Cost of new stock (with a $3 floatation cost): Kncs = D1/NPcs + g 1.10/(35 – 3) + .10 = .1343 or 13.43% © 2011 Pearson Prentice Hall. All rights reserved. 9-18
19.
The Dividend Growth
Model Dividend growth model is simple to use but suffers from the following drawbacks: It assumes a constant growth rate It is not easy to forecast the growth rate © 2011 Pearson Prentice Hall. All rights reserved. 9-19
20.
The Capital Asset
Pricing Model rf = Risk Free rate β = Beta rm – rf = Market Risk Premium or Expected rate of return for “average security” minus the risk free rate © 2011 Pearson Prentice Hall. All rights reserved. 9-20
21.
Capital Asset Pricing
Model Example: If beta is 1.25, risk-free rate is 1.5% and expected return on market is 10% kc = rrf + β (rm – rf) = .015 + 1.25(.10 – .015) = 12.125% © 2011 Pearson Prentice Hall. All rights reserved. 9-21
22.
Capital Asset Pricing
Model Variable estimates CAPM is easy to apply. Also, the estimates for model variables are generally available from public sources. Risk Free Rate: Wide range of US government securities on which to base risk-free rate Beta: Estimates of beta are available from a wide range of services, or can be estimated using regression analysis of historical data. Market risk premium: It can be estimated by looking at history of stock returns and premium earned over risk-free rate. © 2011 Pearson Prentice Hall. All rights reserved. 9-22
23.
3. The Weighted
Average Cost of Capital Bringing it all together: WACC To estimate WACC, we need to know the capital structure mix and the cost of each of the sources of capital. For a firm with only two sources: debt and common equity, © 2011 Pearson Prentice Hall. All rights reserved. 9-23
24.
WACC Example
A firm borrows money at 7% after taxes and pays 12% for equity. The company raises capital in equal proportions i.e. 50% debt and 50% equity. WACC = (.07 × .5) + (.12 × .5) = .095 or 9.5% © 2011 Pearson Prentice Hall. All rights reserved. 9-24
25.
Business world
cost of capital In practice, the calculation of cost of capital may be more complex: If firms have multiple debt issues with different required rates of return. If firms also use preferred stock in addition to common stock financing. © 2011 Pearson Prentice Hall. All rights reserved. 9-25
26.
Table 9-1 ©
2011 Pearson Prentice Hall. All rights reserved. 9-26
27.
Table 9-1 ©
2011 Pearson Prentice Hall. All rights reserved. 9-27
28.
Table 9-3 ©
2011 Pearson Prentice Hall. All rights reserved. 9-28
29.
4. Calculating Divisional
Costs of Capital for PepsiCo Inc. PepsiCo calculated divisional cost of capital for each of its three major divisions: restaurants, food, and beverages. The target ratios for debt/equity mix and the pre-tax cost of debt were different for each division. PepsiCo estimated the WACC for each division in a 3 step process: Estimate the cost of debt for each division Estimate the cost of equity for each division Estimate the WACC (with target capital structure) for each division © 2011 Pearson Prentice Hall. All rights reserved. 9-29
30.
Table 9-4
PepsiCo’s Cost of Debt © 2011 Pearson Prentice Hall. All rights reserved. 9-30
31.
Table 9-5
PepsiCo’s Cost of Equity © 2011 Pearson Prentice Hall. All rights reserved. 9-31
32.
Table 9-6
PepsiCo’s WACC © 2011 Pearson Prentice Hall. All rights reserved. 9-32
33.
5. Cost of
Capital and New Investment Cost of capital can serve as the discount rate in evaluating new investment when the projects offer the same risk as the firm as a whole. If risk differs, it is better to calculate a different cost of capital for each division. © 2011 Pearson Prentice Hall. All rights reserved. 9-33
34.
6. Multinational Firms
and Interest Rates In an international setting, there can be different rates of inflation among different countries. The Fisher Model indicates that the nominal interest rate in the home or domestic country is a function of real interest rates and anticipated rate of inflation. © 2011 Pearson Prentice Hall. All rights reserved. 9-34
35.
Fisher Model and
Domestic Interest Rates rn,h = (1 + rr,h)(1 + ih) – 1 rn,h = Nominal rate of interest at home, U.S. rr,h = real interest rate at home, U.S. Ih = inflation rate at home, U.S Example: If Real interest rate is 3% and inflation rate is 5%, nominal rate will be 8.15% © 2011 Pearson (1.03)(1.05) All 1 = 8.15% Prentice Hall. – rights reserved. 9-35
36.
International or Foreign
Rates and Fisher Effect rn,h – rn,h = ih – if Differences in observed nominal rates of interest between two countries should equal the difference in expected rates of inflation between the two countries. © 2011 Pearson Prentice Hall. All rights reserved. 9-36
37.
Interest Rate Parity
Theorem rn,h = Domestic one-period rate of interest rn,f = Corresponding rate in foreign country E0 & E1 = Exchange rates corresponding to current period (i.e. spot exchange rate) and one-period hence (i.e. the one-period forward exchange rate) © 2011 Pearson Prentice Hall. All rights reserved. 9-37
38.
Interest Rate Parity
Theorem Thus, Nominal interest rates are tied to exchange rates Differences in nominal interest rates are tied to expected rates of inflation © 2011 Pearson Prentice Hall. All rights reserved. 9-38
39.
Interest Rates and
Currency Exchange Rates Example: If domestic one-period interest rate is 15.5%, and the Japanese rate of interest is 5%, the spot exchange rate is $1 to 1 yen and the forward exchange rate is $1.10 to 1 yen. 1 + .155 / 1 + .05 = 1.1/1= 1.10 © 2011 Pearson Prentice Hall. All rights reserved. 9-39
40.
Figure 9-1 ©
2011 Pearson Prentice Hall. All rights reserved. 9-40
41.
Key Terms
Capital Structure Financial Policy Economic Profit Market Value Added Weighted Average Cost of Capital © 2011 Pearson Prentice Hall. All rights reserved. 9-41
Baixar agora