公司理财英文课件Chap012.ppt

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 Chapter Outline 12.1 The Cost of Equity Capital 12.2 Estimation of Beta 12.3 Determinants of Beta 12.4 Extensions of the Basic Model 12.5 Estimating Eastman Chemical’s 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. 12.1 The Cost of Equity Capital The Cost of Equity Capital From the firm’s perspective, the expected return is the Cost of Equity Capital: Example Suppose the stock of Stansfield Enterprises, a publisher of PowerPoint presentations, has a beta of 2.5. 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? Example Suppose Stansfield Enterprises is evaluating the following independent projects. Each costs $100 and lasts one year. Using the SML An all-equity firm should accept projects whose IRRs exceed the cost of equity capital and reject projects whose IRRs fall short of the cost of capital. 12.2 Estimation of Beta Market Portfolio - Portfolio of all assets in the economy. In practice, a broad stock market index, such as the SP Composite, is used to represent the market. Beta - Sensitivity of a stock’s return to the return on the market portfolio. 12.2 Estimation of Beta Stability of Beta Most analysts argue that betas are generally stable for firms remaining in the same industry. That’s not to say that a firm’s beta can’t change. Changes in product line Changes in technology Deregulation Changes in financial leverage Using an Industry Beta It is frequently argued that one can better estimate a fi