Академический Документы
Профессиональный Документы
Культура Документы
ki = kd ( 1 - T )
Determination of
the Cost of Debt
Assume that Basket Wonders (BW) has
$1,000 par value zero-coupon bonds
outstanding. BW bonds are currently
trading at $385.54 with 10 years to
maturity. BW tax bracket is 40%.
$0 + $1,000
$385.54 =
(1 + kd)10
Determination of
the Cost of Debt
(1 + kd)10 = $1,000 / $385.54
= 2.5938
(1 + kd) = (2.5938) (1/10)
= 1.1
kd = .1 or 10%
ki = 10% ( 1 - .40 )
ki = 6%
Cost of Preferred Stock
kP = DP / P0
Determination of the
Cost of Preferred Stock
Assume that Basket Wonders (BW)
has preferred stock outstanding with
par value of $100, dividend per share
of $6.30, and a current market value of
$70 per share.
kP = $6.30 / $70
kP = 9%
Cost of Equity
Approaches
ke = ( D1 / P0 ) + g
g = ( 1 – Payout ) (ROE)
= (0.35) (15%)
= 5.25%
Growth Phases Model
ke = Rj = Rf + (Rm - Rf)bj
Determination of the
Cost of Equity (CAPM)
Assume that Basket Wonders (BW) has
a company beta of 1.25. Research by
Julie Miller suggests that the risk-free
rate is 4% and the expected return on
the market is 11.2%
ke = Rf + (Rm - Rf)bj
= 4% + (11.2% - 4%)1.25
ke = 4% + 9% = 13%
Before-Tax Cost of Debt
Plus Risk Premium
The cost of equity capital, ke, is the
sum of the before-tax cost of debt
and a risk premium in expected
return for common stock over debt.
ke = kd + Risk Premium*
* Risk premium is not the same as CAPM risk
premium
Determination of the
Cost of Equity (kd + R.P.)
Assume that Basket Wonders (BW)
typically adds a 3% premium to the
before-tax cost of debt.
ke = kd + Risk Premium
= 10% + 3%
ke = 13%
After Tax WACC
D E
WACC (1 Tc) rD + rE
V V
Weighted Average Cost of
Capital (WACC)
D E
WACC (1 Tc) rD + rE
V V
After Tax WACC
Example - Sangria Corporation
D E
WACC (1 Tc) rD + rE
V V
50 75
WACC (1 .35) .08 + .146
125 125
.1084
10.84%
Dividend Policy
Types of Dividends
Cash Div
Regular Cash Div
Special Cash Div
Stock Div
Stock Repurchase (methods)
1. Buy shares on the market
2. Tender Offer to Shareholders
Dividend Payments
Cash Dividend - Payment of cash by
the firm to its shareholders.
Dividend Payments
Cash Dividend - Payment of cash by
the firm to its shareholders.
Dividend Change
DIV1 - DIV0 target change
target ratio EPS1 - DIV0
Dividends Increase Value
Market Imperfections and Clientele Effect
There are natural clients for high-payout
stocks, but it does not follow that any
particular firm can benefit by increasing
its dividends. The high dividend clientele
already have plenty of high dividend stock
to choose from.
Outcomes
A B C D
Operating Income $500 1,000 1,500 2,000 Expected
outcome
Earnings per share $.50 1.00 1.50 2.00
Return on shares (%) 5% 10 15 20
M&M (Debt Policy Doesn’t Matter)
Example Data
Number of shares 500
cont.
Price per share $10
50% debt Market Value of Shares $ 5,000
Market val ue of debt $ 5,000
Outcomes
A B C D
Operating Income $500 1,000 1,500 2,000
Interest $500 500 500 500
Equity earnings $0 500 1,000 1,500
Earnings per share $0 1 2 3
Return on shares (%) 0% 10 20 30