Chapter 9
McGraw Hill/Irwin
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
Capital Budgeting and Risk
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Capital Budgeting and Risk презентация
Содержание
- 1. Capital Budgeting and Risk
- 2. Topics Covered Company and Project Costs of
- 3. Company Cost of Capital A firm’s value
- 4. Company Cost of Capital
- 5. Company Cost of Capital A company’s cost
- 6. Measuring Betas The SML shows the relationship
- 7. Measuring Betas Dell Computer Slope determined
- 8. Measuring Betas Dell Computer Slope determined
- 9. Measuring Betas General Motors Slope determined
- 10. Measuring Betas General Motors Slope determined
- 11. Measuring Betas Exxon Mobil Slope determined
- 12. Measuring Betas Exxon Mobil Slope determined
- 13. Beta Stability
- 14. Company Cost of Capital simple approach Company
- 15. Company Cost of Capital simple approach Company
- 16. Capital Structure - the mix of debt
- 17. Capital Structure & COC COC = rportfolio
- 18. Capital Structure & COC Expected return (%)
- 19. Union Pacific Corp. Requity = Return
- 20. Union Pacific Corp.
- 21. Union Pacific Corp. Example
- 22. International Risk Source: The Brattle Group, Inc.
- 23. Asset Betas
- 24. Asset Betas
- 25. Risk,DCF and CEQ
- 26. Risk,DCF and CEQ Example Project A is
- 27. Risk,DCF and CEQ Example Project A is
- 28. Risk,DCF and CEQ Example Project A is
- 29. Risk,DCF and CEQ Example Project A is
- 30. Risk,DCF and CEQ Example Project A is
- 31. Risk,DCF and CEQ Example Project A is
- 32. Risk,DCF and CEQ Example Project A is
- 33. Risk,DCF and CEQ Example Project A is
- 34. Risk,DCF and CEQ Example Project A is
Topics Covered Company and Project Costs of Capital Measuring the Cost of Equity Capital Structure and COC Discount Rates for Intl. Projects Estimating Discount Rates Risk and DCF
Слайд 1
Principles of Corporate Finance
Seventh Edition
Richard A. Brealey
Stewart C. Myers
Slides by
Matthew
Will
Слайд 2Topics Covered
Company and Project Costs of Capital
Measuring the Cost of Equity
Capital
Structure and COC
Discount Rates for Intl. Projects
Estimating Discount Rates
Risk and DCF
Discount Rates for Intl. Projects
Estimating Discount Rates
Risk and DCF
Слайд 3Company Cost of Capital
A firm’s value can be stated as the
sum of the value of its various assets
Слайд 5Company Cost of Capital
A company’s cost of capital can be compared
to the CAPM required return
Required
return
Project Beta
1.26
Company Cost of Capital
13
5.5
0
SML
Слайд 6Measuring Betas
The SML shows the relationship between return and risk
CAPM uses
Beta as a proxy for risk
Other methods can be employed to determine the slope of the SML and thus Beta
Regression analysis can be used to find Beta
Other methods can be employed to determine the slope of the SML and thus Beta
Regression analysis can be used to find Beta
Слайд 7Measuring Betas
Dell Computer
Slope determined from plotting the line of best
fit.
Price data – Aug 88- Jan 95
Market return (%)
Dell return (%)
R2 = .11
B = 1.62
Слайд 8Measuring Betas
Dell Computer
Slope determined from plotting the line of best
fit.
Price data – Feb 95 – Jul 01
Market return (%)
Dell return (%)
R2 = .27
B = 2.02
Слайд 9Measuring Betas
General Motors
Slope determined from plotting the line of best
fit.
Price data – Aug 88- Jan 95
Market return (%)
GM return (%)
R2 = .13
B = 0.80
Слайд 10Measuring Betas
General Motors
Slope determined from plotting the line of best
fit.
Price data – Feb 95 – Jul 01
Market return (%)
GM return (%)
R2 = .25
B = 1.00
Слайд 11Measuring Betas
Exxon Mobil
Slope determined from plotting the line of best
fit.
Price data – Aug 88- Jan 95
Market return (%)
Exxon Mobil return (%)
R2 = .28
B = 0.52
Слайд 12Measuring Betas
Exxon Mobil
Slope determined from plotting the line of best
fit.
Price data – Feb 95 – Jul 01
Market return (%)
Exxon Mobil return (%)
R2 = .16
B = 0.42
Слайд 13Beta Stability
%
IN SAME % WITHIN ONE
RISK CLASS 5 CLASS 5
CLASS YEARS LATER YEARS LATER
10 (High betas) 35 69
9 18 54
8 16 45
7 13 41
6 14 39
5 14 42
4 13 40
3 16 45
2 21 61
1 (Low betas) 40 62
Source: Sharpe and Cooper (1972)
RISK CLASS 5 CLASS 5
CLASS YEARS LATER YEARS LATER
10 (High betas) 35 69
9 18 54
8 16 45
7 13 41
6 14 39
5 14 42
4 13 40
3 16 45
2 21 61
1 (Low betas) 40 62
Source: Sharpe and Cooper (1972)
Слайд 14Company Cost of Capital
simple approach
Company Cost of Capital (COC) is based
on the average beta of the assets
The average Beta of the assets is based on the % of funds in each asset
The average Beta of the assets is based on the % of funds in each asset
Слайд 15Company Cost of Capital
simple approach
Company Cost of Capital (COC) is based
on the average beta of the assets
The average Beta of the assets is based on the % of funds in each asset
Example
1/3 New Ventures B=2.0
1/3 Expand existing business B=1.3
1/3 Plant efficiency B=0.6
AVG B of assets = 1.3
The average Beta of the assets is based on the % of funds in each asset
Example
1/3 New Ventures B=2.0
1/3 Expand existing business B=1.3
1/3 Plant efficiency B=0.6
AVG B of assets = 1.3
Слайд 16Capital Structure - the mix of debt & equity within a
company
Expand CAPM to include CS
R = rf + B ( rm - rf )
becomes
Requity = rf + B ( rm - rf )
Expand CAPM to include CS
R = rf + B ( rm - rf )
becomes
Requity = rf + B ( rm - rf )
Capital Structure
Слайд 17Capital Structure & COC
COC = rportfolio = rassets
rassets = WACC =
rdebt (D) + requity (E)
(V) (V)
Bassets = Bdebt (D) + Bequity (E)
(V) (V)
(V) (V)
Bassets = Bdebt (D) + Bequity (E)
(V) (V)
requity = rf + Bequity ( rm - rf )
IMPORTANT
E, D, and V are all market values
Слайд 18Capital Structure & COC
Expected return (%)
Bdebt
Bassets
Bequity
Rrdebt=8
Rassets=12.2
Requity=15
Expected Returns and Betas prior to
refinancing
Слайд 22International Risk
Source: The Brattle Group, Inc.
σ Ratio - Ratio of standard
deviations, country index vs. S&P composite index
Слайд 26Risk,DCF and CEQ
Example
Project A is expected to produce CF = $100
mil for each of three years. Given a risk free rate of 6%, a market premium of 8%, and beta of .75, what is the PV of the project?
Слайд 27Risk,DCF and CEQ
Example
Project A is expected to produce CF = $100
mil for each of three years. Given a risk free rate of 6%, a market premium of 8%, and beta of .75, what is the PV of the project?
Слайд 28Risk,DCF and CEQ
Example
Project A is expected to produce CF = $100
mil for each of three years. Given a risk free rate of 6%, a market premium of 8%, and beta of .75, what is the PV of the project?
Слайд 29Risk,DCF and CEQ
Example
Project A is expected to produce CF = $100
mil for each of three years. Given a risk free rate of 6%, a market premium of 8%, and beta of .75, what is the PV of the project?
Now assume that the cash flows change, but are RISK FREE. What is the new PV?
Слайд 30Risk,DCF and CEQ
Example
Project A is expected to produce CF = $100
mil for each of three years. Given a risk free rate of 6%, a market premium of 8%, and beta of .75, what is the PV of the project?.. Now assume that the cash flows change, but are RISK FREE. What is the new PV?
Слайд 31Risk,DCF and CEQ
Example
Project A is expected to produce CF = $100
mil for each of three years. Given a risk free rate of 6%, a market premium of 8%, and beta of .75, what is the PV of the project?.. Now assume that the cash flows change, but are RISK FREE. What is the new PV?
Since the 94.6 is risk free, we call it a Certainty Equivalent of the 100.
Слайд 32Risk,DCF and CEQ
Example
Project A is expected to produce CF = $100
mil for each of three years. Given a risk free rate of 6%, a market premium of 8%, and beta of .75, what is the PV of the project? DEDUCTION FOR RISK
Слайд 33Risk,DCF and CEQ
Example
Project A is expected to produce CF = $100
mil for each of three years. Given a risk free rate of 6%, a market premium of 8%, and beta of .75, what is the PV of the project?.. Now assume that the cash flows change, but are RISK FREE. What is the new PV?
The difference between the 100 and the certainty equivalent (94.6) is 5.4%…this % can be considered the annual premium on a risky cash flow
Слайд 34Risk,DCF and CEQ
Example
Project A is expected to produce CF = $100
mil for each of three years. Given a risk free rate of 6%, a market premium of 8%, and beta of .75, what is the PV of the project?.. Now assume that the cash flows change, but are RISK FREE. What is the new PV?
