财务管理课件chap013.ppt

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1、Leverage and Capital Structure,Chapter 13,侯菠谤打腺驰导乎哪糊携煌墒眠忌所戍鞋妆凡翔惟评毖厘痪鸿墨刨空潦怕财务管理课件chap013财务管理课件chap013,13.1,Key Concepts and Skills,Understand the effect of financial leverage on cash flows and cost of equityUnderstand the impact of taxes and bankruptcy on capital structure choiceUnderstand the basic

2、components of the bankruptcy process,庇麻检包冕玲咏委烟稽半渗纺笔晌坚酪巨订苗稀闹氏成登祁狙细右气巫浸财务管理课件chap013财务管理课件chap013,13.2,Chapter Outline,The Capital Structure QuestionThe Effect of Financial LeverageCapital Structure and the Cost of Equity CapitalCorporate Taxes and Capital StructureBankruptcy CostsOptimal Capital Stru

3、ctureObserved Capital StructuresA Quick Look at the Bankruptcy Process,炬宦斋租钟贰花恒毁级韵紧瞳诬脑壮恃各稿芒里翼介猪候砂含丑琅阮久溉财务管理课件chap013财务管理课件chap013,13.3,Capital Restructuring,We are going to look at how changes in capital structure affect the value of the firm,all else equalCapital restructuring involves changing the

4、 amount of leverage a firm has without changing the firms assetsIncrease leverage by issuing debt and repurchasing outstanding sharesDecrease leverage by issuing new shares and retiring outstanding debt,泣借伊弥臣些裳泣碟巨皂沼量念脆胜壬郝链睁卡昌箭滚衍似滓溺彪荚堰寥财务管理课件chap013财务管理课件chap013,13.4,Choosing a Capital Structure,What

5、 is the primary goal of financial managers?Maximize stockholder wealthWe want to choose the capital structure that will maximize stockholder wealthWe can maximize stockholder wealth by maximizing firm value or minimizing WACC,汝麓捍砒疤伙望顾迟滋赘宝匝驾优层赊疽膜售崇坑秽皑乞赂竖缆腿绘吁臂财务管理课件chap013财务管理课件chap013,13.5,The Effect

6、 of Leverage,How does leverage affect the EPS and ROE of a firm?When we increase the amount of debt financing,we increase the fixed interest expenseIf we have a really good year,then we pay our fixed cost and we have more left over for our stockholdersIf we have a really bad year,we still have to pa

7、y our fixed costs and we have less left over for our stockholdersLeverage amplifies the variation in both EPS and ROE,恐俯倾榨彰扛倚胃母常皂贬埂溪亡痛涕典瞒灭杖唤票枚嗓管孝俗乓邑燥激财务管理课件chap013财务管理课件chap013,13.6,Example:Financial Leverage,EPS and ROE,We will ignore the effect of taxes at this stageWhat happens to EPS and ROE whe

8、n we issue debt and buy back shares of stock?,刹弄茎县畏承逆处胖裸双库舱氟掺元垂誓赡邑狠易猿碴漓猜抠狙橡表翌朋财务管理课件chap013财务管理课件chap013,13.7,Example:Financial Leverage,EPS and ROE,Variability in ROECurrent:ROE ranges from 6.25%to 18.75%Proposed:ROE ranges from 2.50%to 27.50%Variability in EPSCurrent:EPS ranges from$1.25 to$3.75Pr

9、oposed:EPS ranges from$0.50 to$5.50The variability in both ROE and EPS increases when financial leverage is increased,件抗叉蜡舔沥鬼误那鸥阎桃辕顷渐蜕逮壶徐踢旷尚犊狐朝妓换辨候决遁羞财务管理课件chap013财务管理课件chap013,13.8,Break-Even EBIT,Find EBIT where EPS is the same under both the current and proposed capital structuresIf we expect EBI

10、T to be greater than the break-even point,then leverage is beneficial to our stockholdersIf we expect EBIT to be less than the break-even point,then leverage is detrimental to our stockholders,怠崭起测唆御缘矩于坛秃殿盅竖蚂逆除井浚婪迟纹廓笑描痹遮振要护帆呼财务管理课件chap013财务管理课件chap013,13.9,Example:Break-Even EBIT,慨淫讯否吠喘溺榴速箩晰贤惭患湍秉倔肮贵

11、负票就撵精噬截手瓷侥涌睁挫财务管理课件chap013财务管理课件chap013,13.10,Example:Homemade Leverage and ROE,Current Capital StructureInvestor borrows$2000 and uses$2000 of their own to buy 200 shares of stockPayoffs:Recession:200(1.25)-.1(2000)=$50Expected:200(2.50)-.1(2000)=$300Expansion:200(3.75)-.1(2000)=$550Mirrors the pay

12、offs from purchasing 100 shares from the firm under the proposed capital structure,Proposed Capital StructureInvestor buys$1000 worth of stock(50 shares)and$1000 worth of Trans Am bonds paying 10%.Payoffs:Recession:50(.50)+.1(1000)=$125Expected:50(3.00)+.1(1000)=$250Expansion:50(5.50)+.1(1000)=$375M

13、irrors the payoffs from purchasing 100 shares under the current capital structure,拉羡桶软坎促抢指侗燃彼茧呜则尊竭舱泵板啃幸竿裂摇垒堕活吸旋耶圭形财务管理课件chap013财务管理课件chap013,13.11,Capital Structure Theory,Modigliani and Miller Theory of Capital StructureProposition I firm valueProposition II WACCThe value of the firm is determined

14、by the cash flows to the firm and the risk of the assetsChanging firm valueChange the risk of the cash flowsChange the cash flows,宜牛毁故溪眯桂焦亡侣驼镜惜皮曳酣替叁诸添厘妆靖望少揽惶徒晨沟辈朴财务管理课件chap013财务管理课件chap013,13.12,Capital Structure Theory Under Three Special Cases,Case I AssumptionsNo corporate or personal taxesNo ban

15、kruptcy costsCase II AssumptionsCorporate taxes,but no personal taxesNo bankruptcy costsCase III AssumptionsCorporate taxes,but no personal taxesBankruptcy costs,哑舷沽祸忿铡撇矣截亢样戏准暂刃味妒菌路徒夹弟沛条箩铀霞挑日镍赁坚财务管理课件chap013财务管理课件chap013,13.13,Case I Propositions I and II,Proposition IThe value of the firm is NOT af

16、fected by changes in the capital structureThe cash flows of the firm do not change,therefore value doesnt changeProposition IIThe WACC of the firm is NOT affected by capital structure,鱼噎痒畅药掷携坦洽拂煽硫吞锦挽肄匪晚迂灿顷倾寄乘逊饺屡舱积磕遣晶财务管理课件chap013财务管理课件chap013,13.14,Case I-Equations,WACC=RA=(E/V)RE+(D/V)RDRE=RA+(RA R

17、D)(D/E)RA is the“cost”of the firms business risk,i.e.,the risk of the firms assets(RA RD)(D/E)is the“cost”of the firms financial risk,i.e.,the additional return required by stockholders to compensate for the risk of leverage,箍得栗傀州拣湾坡眶蚕滤讽坎捧丰秩列摸广冰伊骂泊姓沥邹瘩乳悼侄就匣财务管理课件chap013财务管理课件chap013,13.15,Case I-Exa

18、mple,DataRequired return on assets=16%,cost of debt=10%;percent of debt=45%What is the cost of equity?RE=.16+(.16-.10)(.45/.55)=.2091=20.91%Suppose instead that the cost of equity is 25%,what is the debt-to-equity ratio?.25=.16+(.16-.10)(D/E)D/E=(.25-.16)/(.16-.10)=1.5Based on this information,what

19、is the percent of equity in the firm?E/V=1/2.5=40%,缩蓝拐脆勋色琢筒君掳斯蛔糟吟皖桥票蛋县俭跃摇赶详顷夷败鞘蕊接顺闸财务管理课件chap013财务管理课件chap013,13.16,Figure 13.3,辕植卯跃阀伐砍泳例贺得术菱桥羡瘟钙非抉昂宣闯铺汤拴端符冈忙挽埔淖财务管理课件chap013财务管理课件chap013,13.17,The CAPM,the SML and Proposition II,How does financial leverage affect systematic risk?CAPM:RA=Rf+A(RM Rf)W

20、here A is the firms asset beta and measures the systematic risk of the firms assetsProposition IIReplace RA with the CAPM and assume that the debt is riskless(RD=Rf)RE=Rf+A(1+D/E)(RM Rf),欧祈棺筷守鼓阑厩渊禁值亏轻汽洪蜂匡命拯拧卡糖看笨明熔饮簿逸冈吧孽财务管理课件chap013财务管理课件chap013,13.18,Business Risk and Financial Risk,RE=Rf+A(1+D/E)(

21、RM Rf)CAPM:RE=Rf+E(RM Rf)E=A(1+D/E)Therefore,the systematic risk of the stock depends on:Systematic risk of the assets,A,(Business risk)Level of leverage,D/E,(Financial risk),酪子心铭爬求狞排史美嫡胰媳椿汀柞旗醉柑莫吝骋勘象搭娱植务酥宪撼敢财务管理课件chap013财务管理课件chap013,13.19,Case II Cash Flows,Interest is tax deductibleTherefore,when

22、a firm adds debt,it reduces taxes,all else equalThe reduction in taxes increases the cash flow of the firmHow should an increase in cash flows affect the value of the firm?,杰戒纵恫湍游驴辟痉恩吹琢碑忿梭逊轮风雪陨殊弊蓟柯挪海被垃甥曙囊酿财务管理课件chap013财务管理课件chap013,13.20,Case II-Example,泡磅祷位芥喝非茶雾聪褥覆定呆困窄烦鞭何狗咙思剥盏遇翅溃告溜庭厄液财务管理课件chap013财

23、务管理课件chap013,13.21,Interest Tax Shield,Annual interest tax shieldTax rate times interest payment6250 in 8%debt=500 in interest expenseAnnual tax shield=.34(500)=170Present value of annual interest tax shieldAssume perpetual debt for simplicityPV=170/.08=2125PV=D(RD)(TC)/RD=DTC=6250(.34)=2125,协裹咳暮囚草戴

24、栋吊靶锥桶谆干捅仓瓷敏嘻淹理逞肿裳首院颐恢困专抚那财务管理课件chap013财务管理课件chap013,13.22,Case II Proposition I,The value of the firm increases by the present value of the annual interest tax shieldValue of a levered firm=value of an unlevered firm+PV of interest tax shieldValue of equity=Value of the firm Value of debtAssuming pe

25、rpetual cash flowsVU=EBIT(1-T)/RUVL=VU+DTC,邢培粱腊惨窗档菲殊伟弘替钓冕昼嚎会掏柄撑剁咐韩敛邑列悸盯享叛箱方财务管理课件chap013财务管理课件chap013,13.23,Example:Case II Proposition I,DataEBIT=25 million;Tax rate=35%;Debt=$75 million;Cost of debt=9%;Unlevered cost of capital=12%VU=25(1-.35)/.12=$135.42 millionVL=135.42+75(.35)=$161.67 millionE=

26、161.67 75=$86.67 million,洪姨腻俱让淄颇陇眉心介谤培说乐翘器诚果十逛赠巨燎较毙宇滋硒诊碑护财务管理课件chap013财务管理课件chap013,13.24,Figure 13.4,嫌辙积涎揉第咬求够喻浓奇肇徒憋川莉额屉绰萄佣拭柔渐如耗拟壮蹄何藐财务管理课件chap013财务管理课件chap013,13.25,Case II Proposition II,The WACC decreases as D/E increases because of the government subsidy on interest paymentsRA=(E/V)RE+(D/V)(RD)

27、(1-TC)RE=RU+(RU RD)(D/E)(1-TC)ExampleRE=.12+(.12-.09)(75/86.67)(1-.35)=13.69%RA=(86.67/161.67)(.1369)+(75/161.67)(.09)(1-.35)RA=10.05%,僻服澡端兑涪防沧芝铸姑啸咎严睬吹鲍寿钝献盈奇段妮诞痛南懦巩伤脏胯财务管理课件chap013财务管理课件chap013,13.26,Example:Case II Proposition II,Suppose that the firm changes its capital structure so that the debt-

28、to-equity ratio becomes 1.What will happen to the cost of equity under the new capital structure?RE=.12+(.12-.09)(1)(1-.35)=13.95%What will happen to the weighted average cost of capital?RA=.5(.1395)+.5(.09)(1-.35)=9.9%,俐专侍懒号穿熄郁沾诀缩擞仆荆捉食戊及蒙粥团债克辣虹匿剿逞妓某磁均财务管理课件chap013财务管理课件chap013,13.27,Illustration of

29、 Proposition II,迢箭五恳灌坊终但膊畏轩铱天谣躁坡炳牢等烙君棉红歧计带色搓炳胡伊人财务管理课件chap013财务管理课件chap013,13.28,Case III,Now we add bankruptcy costsAs the D/E ratio increases,the probability of bankruptcy increasesThis increased probability will increase the expected bankruptcy costsAt some point,the additional value of the inter

30、est tax shield will be offset by the expected bankruptcy costAt this point,the value of the firm will start to decrease and the WACC will start to increase as more debt is added,达果颠州蔚羽麓馋公脱瘦网榆怜短盛荆粕曝溶镣镀够碱樟嚏醛咸淳承鬼镁财务管理课件chap013财务管理课件chap013,13.29,Bankruptcy Costs,Direct costsLegal and administrative cos

31、tsUltimately cause bondholders to incur additional lossesDisincentive to debt financingFinancial distressSignificant problems in meeting debt obligationsMost firms that experience financial distress do not ultimately file for bankruptcy,乞律售巨墨潮每速稼胳西阑供椒末磊嘴颐恤毒抓瓜摆祖认汾柔栖脸分猾等财务管理课件chap013财务管理课件chap013,13.3

32、0,More Bankruptcy Costs,Indirect bankruptcy costsLarger than direct costs,but more difficult to measure and estimateStockholders wish to avoid a formal bankruptcy filingBondholders want to keep existing assets intact so they can at least receive that moneyAssets lose value as management spends time

33、worrying about avoiding bankruptcy instead of running the businessAlso have lost sales,interrupted operations and loss of valuable employees,涛奋驴仙刘锈束痕丛娶造敖坏在素斌灶涎懒技髓垛因盅宰骆铆孽卖竟辣婉财务管理课件chap013财务管理课件chap013,13.31,Figure 13.5,银橡电疯箍辑山寥呵爽导筷剪庇抓友本样倡堪裤帽心喊蛮剥蜜妥啤鸥踢纬财务管理课件chap013财务管理课件chap013,13.32,Conclusions,Case

34、I no taxes or bankruptcy costsNo optimal capital structureCase II corporate taxes but no bankruptcy costsOptimal capital structure is 100%debtEach additional dollar of debt increases the cash flow of the firmCase III corporate taxes and bankruptcy costsOptimal capital structure is part debt and part

35、 equityOccurs where the benefit from an additional dollar of debt is just offset by the increase in expected bankruptcy costs,领纯孪疆币腿写著润播濒鼻歉咖乾落占汀葫他锐蛀泳狭辟娠卿对吴偷垂契财务管理课件chap013财务管理课件chap013,13.33,Figure 13.6,并滦名枢帆敛鸳藕陇饼密刀挡棺竿伊姬玉押舀拯释蝴赦短围怪朗臃炯泰裸财务管理课件chap013财务管理课件chap013,13.34,Additional Managerial Recommenda

36、tions,The tax benefit is only important if the firm has a large tax liabilityRisk of financial distressThe greater the risk of financial distress,the less debt will be optimal for the firmThe cost of financial distress varies across firms and industries and as a manager you need to understand the co

37、st for your industry,邯羽粪脸耳惭综直圃梨剃村仕仲宰攫涅腐酬南痹雍孽路撼捅隋姿桩峰田假财务管理课件chap013财务管理课件chap013,13.35,Observed Capital Structure,Capital structure does differ by industriesDifferences according to Cost of Capital 2000 Yearbook by Ibbotson Associates,Inc.Lowest levels of debtDrugs with 2.75%debtComputers with 6.91%d

38、ebtHighest levels of debtSteel with 55.84%debtDepartment stores with 50.53%debt,谴埃领抽摈瘫羽哥租解巡蛾宙而请铣辜示由咸贷佃办钱帐忘觅吻倍测莎范财务管理课件chap013财务管理课件chap013,13.36,Work the Web Example,You can find information about a companys capital structure relative to its industry,sector and the S&P 500 at Yahoo MarketguideClick

39、on the web surfer to go to the siteChoose a company and get a quoteChoose ratio comparisons,硷瑶拔赵铸伪和烬赘算录豆奋站炊袒烈渝射嫉第么筏弧惕屑秧储酥信欺伶财务管理课件chap013财务管理课件chap013,13.37,Bankruptcy Process Part I,Business failure business has terminated with a loss to creditorsLegal bankruptcy petition federal court for bankrupt

40、cyTechnical insolvency firm is unable to meet debt obligationsAccounting insolvency book value of equity is negative,敌肇鄂艺镇囚逼委盯篆差剔殴恨惊宣削裳誉驻潜臂膀枯瞒袍顶督泻馋纱奉财务管理课件chap013财务管理课件chap013,13.38,Bankruptcy Process Part II,LiquidationChapter 7 of the Federal Bankruptcy Reform Act of 1978Trustee takes over assets,

41、sells them and distributes the proceeds according to the absolute priority ruleReorganizationChapter 11 of the Federal Bankruptcy Reform Act of 1978Restructure the corporation with a provision to repay creditors,槽船胃喊丙启熄舌盂肥瞥绣涂腾咋磕执颇喂叶擅遣没匿赡薄扮吼心臼胚过财务管理课件chap013财务管理课件chap013,13.39,Quick Quiz,Explain the

42、effect of leverage on EPS and ROEWhat is the break-even EBIT?How do we determine the optimal capital structure?What is the optimal capital structure in the three cases that were discussed in this chapter?What is the difference between liquidation and reorganization?,票宰墓咱晰写邵雇玄终迸镜皱婆邮她地染均改虑骇榨覆吊捎诉直锈申艘途财务管理课件chap013财务管理课件chap013,