Chapter 11 - Capital Budgeting and Risk Analysis Chapter 12 - Cost of Capital IIS 1 Tujuan Pembelajaran 1 Mahasiswa mampu untuk: IIS Menjelaskan pengukuran risiko yang tepat untuk tujuan penganggara modal Menetapkan akseptabilitas dari suatu proyek baru dengan menggunakan baik metode certainty equivalent maupun metode riskadjusted discount risk Menjelaskan penggunaan simulasi dan pohon probabilitas untuk mengimitasi kinerja proyek yang sedang dievaluasi 2 Pokok Bahasan 1 Risiko dan keputusan investasi Metode-metode untuk memasukkan risiko ke dalam penganggaran modal Pendekatan lain untuk mengevaluasi risiko dalam penganggaran modal IIS 3 Tujuan Pembelajaran 2 Mahasiswa mampu untuk: Menjelaskan konsep yang mendasari biaya modal perusahaan dan tujuan perhitungannya Menghitung biaya modal setelah pajak untuk hutang, saham preferen dan saham biasa, serta biaya modal rata-rata tertimbang suatu perusahaan Menjelaskan prosedur untuk menaksir biaya modal pada perusahaan yang memiliki banyak divisi Menggunakan biaya modal untuk mengevaluasi investasi baru IIS 4 Pokok Bahasan 2 Biaya Modal: Definisi dan Konsep kunci Menghitung biaya modal individual Biaya modal rata-rata tertimbang Menghitung Biaya Modal Divisi: Kasus Pepsico, Inc. Menggunakan cost of capital perusahaan untuk mengevaluasi investasi baru IIS 5 Three Measures of a Project’s Risk Project Standing Alone Risk Project’s Contributionto-Firm Risk Systematic Risk IIS Risk diversified away within firm as this project is combined with firm’s other projects and assets. Risk diversified away by shareholders as securities are combined to form diversified portfolio. 6 Incorporating Risk into Capital Budgeting Two Methods: Certainty Equivalent Approach Risk-Adjusted Discount Rate IIS 7 How can we adjust this model to take risk into account? n NPV = S FCFt (1 + k) t - IO t=1 Adjust the After-tax Cash Flows (ACFs), or Adjust the discount rate (k). IIS 8 Certainty Equivalent Approach Adjusts the risky after-tax cash flows to certain cash flows. The idea: Risky Cash Flow IIS X Certainty Equivalent Factor (a) Certain = Cash Flow 9 Certainty Equivalent Approach Risky Cash X Flow Risky $1000 IIS Certainty Equivalent Factor (a) .95 = Certain Cash Flow “safe” $950 10 The greater the risk associated with a particular cash flow, the smaller the CE factor. IIS 11 Certainty Equivalent Method n NPV = S t ACFt IO (1 + krf) t t=1 IIS 12 Certainty Equivalent Approach Steps: 1) Adjust all after-tax cash flows by certainty equivalent factors to get certain cash flows. 2) Discount the certain cash flows by the risk-free rate of interest. IIS 13 Incorporating Risk into Capital Budgeting Risk-Adjusted Discount Rate IIS 14 How can we adjust this model to take risk into account? n NPV = S ACFt (1 + k) t - IO t=1 Adjust the discount rate (k). IIS 15 Risk-Adjusted Discount Rate Simply adjust the discount rate (k) to reflect higher risk. Riskier projects will use higher risk-adjusted discount rates. Calculate NPV using the new riskadjusted discount rate. IIS 16 Risk-Adjusted Discount Rate n NPV = S FCFt IO t (1 + k*) t=1 IIS 17 Risk-Adjusted Discount Rates How do we determine the appropriate risk-adjusted discount rate (k*) to use? Many firms set up risk classes to categorize different types of projects. IIS 18 Risk Classes Risk RADR Class (k*) 1 12% 2 3 4 IIS 14% 16% 24% Project Type Replace equipment, Expand current business Related new products Unrelated new products Research & Development 19 Summary: Risk and Capital Budgeting You can adjust your capital budgeting methods for projects having different levels of risk by: Adjusting the discount rate used (riskadjusted discount rate method), Measuring the project’s systematic risk, Analyzing computer simulation methods, Performing scenario analysis, and Performing sensitivity analysis. IIS 20 Chapter 12 - Cost of Capital IIS  2005, Pearson Prentice Hall 21 Where we’ve been... Basic Skills: (Time value of money, Financial Statements) Investments: (Stocks, Bonds, Risk and Return) Corporate Finance: (The Investment Decision - Capital Budgeting) IIS 22 The investment decision Assets Current Assets Fixed Assets IIS Liabilities & Equity Current Liabilities Long-term Debt Preferred Stock Common Equity 23 Where we’re going... Corporate Finance: (The Financing Decision) Cost of capital Leverage Capital Structure Dividends IIS 24 The financing decision Assets Current Assets Fixed Assets IIS Liabilities & Equity Current Liabilities Long-term Debt Preferred Stock Common Equity 25 Assets Current assets Capital Structure IIS Liabilities & Equity Current Liabilities Long-term Debt Preferred Stock Common Equity 26 Ch. 12 - Cost of Capital For Investors, the rate of return on a security is a benefit of investing. For Financial Managers, that same rate of return is a cost of raising funds that are needed to operate the firm. In other words, the cost of raising funds is the firm’s cost of capital. IIS 27 How can the firm raise capital? Bonds Preferred Stock Common Stock Each of these offers a rate of return to investors. This return is a cost to the firm. “Cost of capital” actually refers to the weighted cost of capital - a weighted average cost of financing sources. IIS 28 Cost of Debt IIS 29 Cost of Debt For the issuing firm, the cost of debt is: the rate of return required by investors, adjusted for flotation costs (any costs associated with issuing new bonds), and adjusted for taxes. IIS 30 Example: Tax effects of financing with debt EBIT - interest expense EBT - taxes (34%) EAT IIS with stock 400,000 0 400,000 (136,000) 264,000 with debt 400,000 (50,000) 350,000 (119,000) 231,000 31 Example: Tax effects of financing with debt EBIT - interest expense EBT - taxes (34%) EAT IIS with stock 400,000 0 400,000 (136,000) 264,000 with debt 400,000 (50,000) 350,000 (119,000) 231,000 Now, suppose the firm pays $50,000 in dividends to the stockholders. 32 Example: Tax effects of financing with debt with stock EBIT 400,000 - interest expense 0 EBT 400,000 - taxes (34%) (136,000) EAT 264,000 - dividends (50,000) Retained earnings 214,000 IIS with debt 400,000 (50,000) 350,000 (119,000) 231,000 0 231,000 33 After-tax Before-tax % cost of = % cost of Debt Debt Kd .066 IIS = = x 1 Marginal - tax rate kd (1 - T) .10 (1 - .34) 34 Example: Cost of Debt Prescott Corporation issues a $1,000 par, 20 year bond paying the market rate of 10%. Coupons are semiannual. The bond will sell for par since it pays the market rate, but flotation costs amount to $50 per bond. What is the pre-tax and after-tax cost of debt for Prescott Corporation? IIS 35 Pre-tax cost of debt: (using TVM) P/Y = 2 N = 40 PMT = -50 FV = -1000 So, a 10% bond PV = 950 costs the firm solve: I = 10.61% = kd only 7% (with After-tax cost of debt: flotation costs) Kd = kd (1 - T) since the interest Kd = .1061 (1 - .34) is tax deductible. = .07 = 7% 36 IIS Kd Cost of Preferred Stock Finding the cost of preferred stock is similar to finding the rate of return (from Chapter 8), except that we have to consider the flotation costs associated with issuing preferred stock. IIS 37 Cost of Preferred Stock Recall: kp = D Po = Dividend Price From the firm’s point of view: kp = D NPo = Dividend Net Price NPo = price - flotation costs! IIS 38 Example: Cost of Preferred If Prescott Corporation issues preferred stock, it will pay a dividend of $8 per year and should be valued at $75 per share. If flotation costs amount to $1 per share, what is the cost of preferred stock for Prescott? IIS 39 Cost of Preferred Stock D kp = NPo = IIS 8.00 74.00 = Dividend Net Price = 10.81% 40 Cost of Common Stock There are two sources of Common Equity: 1) Internal common equity (retained earnings). 2) External common equity (new common stock issue). Do these two sources have the same cost? IIS 41 Cost of Internal Equity Since the stockholders own the firm’s retained earnings, the cost is simply the stockholders’ required rate of return. Why? If managers are investing stockholders’ funds, stockholders will expect to earn an acceptable rate of return. IIS 42 Cost of Internal Equity 1) Dividend Growth Model D1 kc = Po +g 2) Capital Asset Pricing Model (CAPM) kj = krf + b j (km - krf ) IIS 43 Cost of External Equity Dividend Growth Model D1 knc = NPo + g Net proceeds to the firm after flotation costs! IIS 44 Weighted Cost of Capital The weighted cost of capital is just the weighted average cost of all of the financing sources. IIS 45 Weighted Cost of Capital Source debt preferred common IIS Cost 6% 10% 16% Capital Structure 20% 10% 70% 46 Weighted Cost of Capital (20% debt, 10% preferred, 70% common) Weighted cost of capital = .20 (6%) + .10 (10%) + .70 (16%) = 13.4% IIS 47 Penutup Tugas IIS 48