文档介绍：CHAPTER 12 Risk, Cost of Capital, and Capital Budgeting
Risk, Cost of Capital, and Capital Budgeting
Key Concepts and Skills
Know how to determine a firm’s cost of equity capital
Understand the impact of beta in determining the firm’s cost of equity capital
Know how to determine the firm’s overall cost of capital
Understand how the liquidity of a firm’s stock affects its cost of capital
Chapter Outline
121>.1 The Cost of Equity Capital
Estimation of Beta
Determinants of Beta
Extensions of the Basic Model
Estimating Eastman Chemical’s Cost of Capital
Reducing the Cost of Capital
Where Do We Stand?
Earlier chapters on capital budgeting focused on the appropriate size and timing of cash flows.
This chapter discusses the appropriate discount rate when cash flows are risky.
The Cost of Equity Capital
Invest in project
Firm with excess cash
Shareholder’s Terminal Value
Pay cash dividend
Shareholder invests in financial asset
Because stockholders can reinvest the dividend in risky financial assets, the expected return on a capital-budgeting project should be at least as great as the expected return on a financial asset parable risk.
A firm with excess cash can either pay a dividend or make a capital investment
The Cost of Equity Capital
From the firm’s perspective, the expected return is the Cost of Equity Capital:
To estimate a firm’s cost of equity capital, we need to know three things:
The risk-free rate, RF
The market risk premium,
pany beta,
Example
Suppose the stock of Stansfield Enterprises, a publisher of PowerPoint presentations, has a beta of . The firm is 100% equity financed.
Assume a risk-free rate of 5% and a market risk premium of 10%.
What is the appropriate discount rate for an expansion of this firm?
Example
Suppose Stansfield Enterprises is evaluating the following independent projects. Each costs $100 and lasts one year.
Project
Project b
Project’s Estimated Cash Flows Next Year