文档介绍：CHAPTER 12 Risk, Cost of Capital, and Capital Budgeting6306
CHAPTER
12
Risk, Cost of Capital, and Capital Budgeting
Chapter Outline
123>.1 The Cost of Equity Capital
Estimation of Beta
Determinants of Beta
Extensions of the Basic Model
Estimating International Paper’s Cost of Capital
Reducing the Cost of Capital
Summary and Conclusions
What’s the Big Idea?
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
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:
)
(
F
M
i
F
i
R
R
β
R
R
-
+
=
The risk-free rate, RF
F
M
R
R
-
The market risk premium,
2
,
)
(
)
,
(
M
M
i
M
M
i
i
σ
σ
R
Var
R
R
Cov
β
=
=
pany beta,
Example
Suppose the stock of Stansfield Enterprises, a publisher of PowerPoint presentations, has a beta of . The firm is 100-percent equity financed.
Assume a risk-free rate of 5-percent and a market risk premium of 10-percent.
What is the appropriate discount rate for an expansion of this firm?
%
10
5
.
2
%
5
?
+
=
R
%
30
=
R
Example (continued)
Suppose Stansfield Enterprises is evaluating the following non-mutually exclusive projects. Each costs $100 and lasts one year.
Project
Project b
Project’s Estimated Cash Flows Next Year
IRR
NPV at 30%
A