財務管理第十四章-課件

Chapter14CostofCapitalMcGraw-Hill/IrwinCopyright?2013byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Chapter14McGraw-Hill/IrwinCopKeyConceptsandSkillsKnowhowtodetermineafirm’scostofequitycapitalKnowhowtodetermineafirm’scostofdebtKnowhowtodetermineafirm’soverallcostofcapitalKnowhowtohandleflotationcostsUnderstandpitfallsofoverallcostofcapitalandhowtomanagethem14-2KeyConceptsandSkillsKnowhoChapterOutlineTheCostofCapital:SomePreliminariesTheCostofEquityTheCostsofDebtandPreferredStockTheWeightedAverageCostofCapitalDivisionalandProjectCostsofCapitalFlotationCostsandtheWeightedAverageCostofCapital14-3ChapterOutlineTheCostofCapWhyCostofCapitalIsImportantWeknowthatthereturnearnedonassetsdependsontheriskofthoseassetsThereturntoaninvestoristhesameasthecosttothecompanyOurcostofcapitalprovidesuswithanindicationofhowthemarketviewstheriskofourassetsKnowingourcostofcapitalcanalsohelpusdetermineourrequiredreturnforcapitalbudgetingprojects14-4WhyCostofCapitalIsImportaRequiredReturnTherequiredreturnisthesameastheappropriatediscountrateandisbasedontheriskofthecashflowsWeneedtoknowtherequiredreturnforaninvestmentbeforewecancomputetheNPVandmakeadecisionaboutwhetherornottotaketheinvestmentWeneedtoearnatleasttherequiredreturntocompensateourinvestorsforthefinancingtheyhaveprovided14-5RequiredReturnTherequiredreCostofEquityThecostofequityisthereturnrequiredbyequityinvestorsgiventheriskofthecashflowsfromthefirmBusinessriskFinancialriskTherearetwomajormethodsfordeterminingthecostofequityDividendgrowthmodelSML,orCAPM14-6CostofEquityThecostofequiTheDividendGrowthModelApproachStartwiththedividendgrowthmodelformulaandrearrangetosolveforRE14-7TheDividendGrowthModelApprExample:Dividend

GrowthModelSupposethatyourcompanyisexpectedtopayadividendof$1.50persharenextyear.Therehasbeenasteadygrowthindividendsof5.1%peryearandthemarketexpectsthattocontinue.Thecurrentpriceis$25.Whatisthecostofequity?14-8Example:Dividend

GrowthModeExample:EstimatingtheDividendGrowthRateOnemethodforestimatingthegrowthrateistousethehistoricalaverageYear Dividend PercentChange2008 1.23 -2009 1.30 2010 1.36 2011 1.43 2012 1.50(1.30–1.23)/1.23=5.7%(1.36–1.30)/1.30=4.6%(1.43–1.36)/1.36=5.1%(1.50–1.43)/1.43=4.9%Average=(5.7+4.6+5.1+4.9)/4=5.1%14-9Example:EstimatingtheDivideAdvantagesandDisadvantagesofDividendGrowthModelAdvantage–easytounderstandanduseDisadvantagesOnlyapplicabletocompaniescurrentlypayingdividendsNotapplicableifdividendsaren’tgrowingatareasonablyconstantrateExtremelysensitivetotheestimatedgrowthrate---anincreaseingof1%increasesthecostofequityby1%Doesnotexplicitlyconsiderrisk14-10AdvantagesandDisadvantagesoTheSMLApproachUsethefollowinginformationtocomputeourcostofequityRisk-freerate,RfMarketriskpremium,E(RM)–RfSystematicriskofasset,14-11TheSMLApproachUsethefollowExample-SMLSupposeyourcompanyhasanequitybetaof.58,andthecurrentrisk-freerateis6.1%.Iftheexpectedmarketriskpremiumis8.6%,whatisyourcostofequitycapital?RE=6.1+.58(8.6)=11.1%SincewecameupwithsimilarnumbersusingboththedividendgrowthmodelandtheSMLapproach,weshouldfeelgoodaboutourestimate14-12Example-SMLSupposeyourcompAdvantagesandDisadvantagesofSMLAdvantagesExplicitlyadjustsforsystematicriskApplicabletoallcompanies,aslongaswecanestimatebetaDisadvantagesHavetoestimatetheexpectedmarketriskpremium,whichdoesvaryovertimeHavetoestimatebeta,whichalsovariesovertimeWeareusingthepasttopredictthefuture,whichisnotalwaysreliable14-13AdvantagesandDisadvantagesoExample–CostofEquitySupposeourcompanyhasabetaof1.5.Themarketriskpremiumisexpectedtobe9%,andthecurrentrisk-freerateis6%.Wehaveusedanalysts’estimatestodeterminethatthemarketbelievesourdividendswillgrowat6%peryearandourlastdividendwas$2.Ourstockiscurrentlysellingfor$15.65.Whatisourcostofequity?UsingSML:RE=6%+1.5(9%)=19.5%UsingDGM:RE=[2(1.06)/15.65]+.06=19.55%14-14Example–CostofEquitySupposCostofDebtThecostofdebtistherequiredreturnonourcompany’sdebtWeusuallyfocusonthecostoflong-termdebtorbondsTherequiredreturnisbestestimatedbycomputingtheyield-to-maturityontheexistingdebtWemayalsouseestimatesofcurrentratesbasedonthebondratingweexpectwhenweissuenewdebtThecostofdebtisNOTthecouponrate14-15CostofDebtThecostofdebtiExample:CostofDebtSupposewehaveabondissuecurrentlyoutstandingthathas25yearslefttomaturity.Thecouponrateis9%,andcouponsarepaidsemiannually.Thebondiscurrentlysellingfor$908.72per$1,000bond.Whatisthecostofdebt?N=50;PMT=45;FV=1000;PV=-908.72;CPTI/Y=5%;YTM=5(2)=10%14-16Example:CostofDebtSupposewCostofPreferredStockRemindersPreferredstockgenerallypaysaconstantdividendeachperiodDividendsareexpectedtobepaideveryperiodforeverPreferredstockisaperpetuity,sowetaketheperpetuityformula,rearrangeandsolveforRPRP=D/P014-17CostofPreferredStockRemindeExample:CostofPreferredStockYourcompanyhaspreferredstockthathasanannualdividendof$3.Ifthecurrentpriceis$25,whatisthecostofpreferredstock?RP=3/25=12%14-18Example:CostofPreferredStoTheWeightedAverageCostofCapitalWecanusetheindividualcostsofcapitalthatwehavecomputedtogetour“average”costofcapitalforthefirm.This“average”istherequiredreturnonthefirm’sassets,basedonthemarket’sperceptionoftheriskofthoseassetsTheweightsaredeterminedbyhowmuchofeachtypeoffinancingisused14-19TheWeightedAverageCostofCCapitalStructureWeightsNotationE=marketvalueofequity=#ofoutstandingsharestimespricepershareD=marketvalueofdebt=#ofoutstandingbondstimesbondpriceV=marketvalueofthefirm=D+EWeightswE=E/V=percentfinancedwithequitywD=D/V=percentfinancedwithdebt14-20CapitalStructureWeightsNotatExample:CapitalStructureWeightsSupposeyouhaveamarketvalueofequityequalto$500millionandamarketvalueofdebtequalto$475million.Whatarethecapitalstructureweights?V=500million+475million=975millionwE=E/V=500/975=.5128=51.28%wD=D/V=475/975=.4872=48.72%14-21Example:CapitalStructureWeiTaxesandtheWACCWeareconcernedwithafter-taxcashflows,sowealsoneedtoconsidertheeffectoftaxesonthevariouscostsofcapitalInterestexpensereducesourtaxliabilityThisreductionintaxesreducesourcostofdebtAfter-taxcostofdebt=RD(1-TC)Dividendsarenottaxdeductible,sothereisnotaximpactonthecostofequityWACC=wERE+wDRD(1-TC)14-22TaxesandtheWACCWeareconceExtendedExample:WACC-IEquityInformation50millionshares$80pershareBeta=1.15Marketriskpremium=9%Risk-freerate=5%DebtInformation$1billioninoutstandingdebt(facevalue)Currentquote=110Couponrate=9%,semiannualcoupons15yearstomaturityTaxrate=40%14-23ExtendedExample:WACC-IEquiExtendedExample:WACC-IIWhatisthecostofequity?RE=5+1.15(9)=15.35%Whatisthecostofdebt?N=30;PV=-1,100;PMT=45;FV=1,000;CPTI/Y=3.9268RD=3.927(2)=7.854%Whatistheafter-taxcostofdebt?RD(1-TC)=7.854(1-.4)=4.712%14-24ExtendedExample:WACC-IIWhaExtendedExample:WACC-IIIWhatarethecapitalstructureweights?E=50million(80)=4billionD=1billion(1.10)=1.1billionV=4+1.1=5.1billionwE=E/V=4/5.1=.7843wD=D/V=1.1/5.1=.2157WhatistheWACC?WACC=.7843(15.35%)+.2157(4.712%)=13.06%14-25ExtendedExample:WACC-IIIWhEastmanChemicalIClickonthewebsurfertogotoYahoo!FinancetogetinformationonEastmanChemical(EMN)UnderProfileandKeyStatistics,youcanfindthefollowinginformation:#ofsharesoutstandingBookvaluepersharePricepershareBetaUnderanalystsestimates,youcanfindanalystsestimatesofearningsgrowth(useasaproxyfordividendgrowth)TheBondssectionatYahoo!FinancecanprovidetheT-billrateUsethisinformation,alongwiththeCAPMandDGMtoestimatethecostofequity14-26EastmanChemicalIClickontheEastmanChemicalIIGotoFINRAtogetmarketinformationonEastmanChemical’sbondissuesEnterEastmanChtofindthebondinformationNotethatyoumaynotbeabletofindinformationonallbondissuesduetotheilliquidityofthebondmarketGototheSECwebsitetogetbookvalueinformationfromthefirm’smostrecent10Q14-27EastmanChemicalIIGotoFINRAEastmanChemicalIIIFindtheweightedaveragecostofthedebtUsemarketvaluesifyouwereabletogettheinformationUsethebookvaluesifmarketinformationwasnotavailableTheyareoftenverycloseComputetheWACCUsemarketvalueweightsifavailable14-28EastmanChemicalIIIFindthewExample:WorktheWeb14-29Example:WorktheWeb14-29Table14.1CostofEquity14-30Table14.1CostofEquity14-30Table14.1CostofDebt14-31Table14.1CostofDebt14-31Table14.1WACC14-32Table14.1WACC14-32DivisionalandProjectCostsofCapitalUsingtheWACCasourdiscountrateisonlyappropriateforprojectsthathavethesameriskasthefirm’scurrentoperationsIfwearelookingataprojectthatdoesNOThavethesameriskasthefirm,thenweneedtodeterminetheappropriatediscountrateforthatprojectDivisionsalsooftenrequireseparate

discountrates14-33DivisionalandProjectCostsoExample:UsingWACC

forAllProjectsWhatwouldhappenifweusetheWACCforallprojectsregardlessofrisk?AssumetheWACC=15%Project RequiredReturn IRRA 20% 17%B 15% 18%C 10% 12%14-34Example:UsingWACC

forAllPThePurePlayApproachFindoneormorecompaniesthatspecializeintheproductorservicethatweareconsideringComputethebetaforeachcompanyTakeanaverageUsethatbetaalongwiththeCAPMtofindtheappropriatereturnforaprojectofthatriskOftendifficulttofindpureplaycompanies14-35ThePurePlayApproachFindoneSubjectiveApproachConsidertheproject’sriskrelativetothefirmoverallIftheprojecthasmoreriskthanthefirm,useadiscountrategreaterthantheWACCIftheprojecthaslessriskthanthefirm,useadiscountratelessthantheWACCYoumaystillacceptprojectsthatyoushouldn’tandrejectprojectsyoushouldaccept,butyourerrorrateshouldbelowerthannotconsideringdifferentialriskatall14-36SubjectiveApproachConsiderthExample:Subjective

ApproachRiskLevelDiscountRateVeryLowRiskWACC–8%LowRiskWACC–3%SameRiskasFirmWACCHighRiskWACC+5%VeryHighRiskWACC+10%14-37Example:Subjective

ApproachRFlotationCostsTherequiredreturndependsontherisk,nothowthemoneyisraisedHowever,thecostofissuingnewsecuritiesshouldnotjustbeignoredeitherBasicApproachComputetheweightedaverageflotationcostUsethetargetweightsbecausethefirmwillissuesecuritiesinthesepercentagesoverthelongterm14-38FlotationCostsTherequiredreExample:NPVand

FlotationCostsYourcompanyisconsideringaprojectthatwillcost$1million.Theprojectwillgenerateafter-taxcashflowsof$250,000peryearfor7years.TheWACCis15%,andthefirm’stargetD/Eratiois.6Theflotationcostforequityis5%,andtheflotationcostfordebtis3%.WhatistheNPVfortheprojectafteradjustingforflotationcosts?fA=(.375)(3%)+(.625)(5%)=4.25%PVoffuturecashflows=1,040,105NPV=1,040,105-1,000,000/(1-.0425)=-4,281TheprojectwouldhaveapositiveNPVof40,105withoutconsideringflotationcostsOnceweconsiderthecostofissuingnewsecurities,theNPVbecomesnegative14-39Example:NPVand

FlotationCoQuickQuizWhatarethetwoapproachesforcomputingthecostofequity?Howdoyoucomputethecostofdebtandtheafter-taxcostofdebt?HowdoyoucomputethecapitalstructureweightsrequiredfortheWACC?WhatistheWACC?WhathappensifweusetheWACCforthediscountrateforallprojects?WhataretwomethodsthatcanbeusedtocomputetheappropriatediscountratewhenWACCisn’tappropriate?Howshouldwefactorflotationcostsintoouranalysis?14-40QuickQuizWhatarethetwoappEthicsIssuesHowcouldaprojectmanageradjustthecostofcapital(i.e.,appropriatediscountrate)toincreasethelikelihoodofhavinghis/herprojectaccepted?Isthisethicalorfinanciallysound?14-41EthicsIssuesHowcouldaprojeComprehensiveProblemAcorporationhas10,000bondsoutstandingwitha6%annualcouponrate,8yearstomaturity,a$1,000facevalue,anda$1,100marketprice.Thecompany’s100,000sharesofpreferredstockpaya$3annualdividend,andsellfor$30pershare.Thecompany’s500,000sharesofcommonstocksellfor$25pershareandhaveabetaof1.5.Theriskfreerateis4%,andthemarketreturnis12%.Assuminga40%taxrate,whatisthecompany’sWACC?14-42ComprehensiveProblemAcorporaEndofChapter14-43EndofChapter14-43Chapter14CostofCapitalMcGraw-Hill/IrwinCopyright?2013byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Chapter14McGraw-Hill/IrwinCopKeyConceptsandSkillsKnowhowtodetermineafirm’scostofequitycapitalKnowhowtodetermineafirm’scostofdebtKnowhowtodetermineafirm’soverallcostofcapitalKnowhowtohandleflotationcostsUnderstandpitfallsofoverallcostofcapitalandhowtomanagethem14-45KeyConceptsandSkillsKnowhoChapterOutlineTheCostofCapital:SomePreliminariesTheCostofEquityTheCostsofDebtandPreferredStockTheWeightedAverageCostofCapitalDivisionalandProjectCostsofCapitalFlotationCostsandtheWeightedAverageCostofCapital14-46ChapterOutlineTheCostofCapWhyCostofCapitalIsImportantWeknowthatthereturnearnedonassetsdependsontheriskofthoseassetsThereturntoaninvestoristhesameasthecosttothecompanyOurcostofcapitalprovidesuswithanindicationofhowthemarketviewstheriskofourassetsKnowingourcostofcapitalcanalsohelpusdetermineourrequiredreturnforcapitalbudgetingprojects14-47WhyCostofCapitalIsImportaRequiredReturnTherequiredreturnisthesameastheappropriatediscountrateandisbasedontheriskofthecashflowsWeneedtoknowtherequiredreturnforaninvestmentbeforewecancomputetheNPVandmakeadecisionaboutwhetherornottotaketheinvestmentWeneedtoearnatleasttherequiredreturntocompensateourinvestorsforthefinancingtheyhaveprovided14-48RequiredReturnTherequiredreCostofEquityThecostofequityisthereturnrequiredbyequityinvestorsgiventheriskofthecashflowsfromthefirmBusinessriskFinancialriskTherearetwomajormethodsfordeterminingthecostofequityDividendgrowthmodelSML,orCAPM14-49CostofEquityThecostofequiTheDividendGrowthModelApproachStartwiththedividendgrowthmodelformulaandrearrangetosolveforRE14-50TheDividendGrowthModelApprExample:Dividend

GrowthModelSupposethatyourcompanyisexpectedtopayadividendof$1.50persharenextyear.Therehasbeenasteadygrowthindividendsof5.1%peryearandthemarketexpectsthattocontinue.Thecurrentpriceis$25.Whatisthecostofequity?14-51Example:Dividend

GrowthModeExample:EstimatingtheDividendGrowthRateOnemethodforestimatingthegrowthrateistousethehistoricalaverageYear Dividend PercentChange2008 1.23 -2009 1.30 2010 1.36 2011 1.43 2012 1.50(1.30–1.23)/1.23=5.7%(1.36–1.30)/1.30=4.6%(1.43–1.36)/1.36=5.1%(1.50–1.43)/1.43=4.9%Average=(5.7+4.6+5.1+4.9)/4=5.1%14-52Example:EstimatingtheDivideAdvantagesandDisadvantagesofDividendGrowthModelAdvantage–easytounderstandanduseDisadvantagesOnlyapplicabletocompaniescurrentlypayingdividendsNotapplicableifdividendsaren’tgrowingatareasonablyconstantrateExtremelysensitivetotheestimatedgrowthrate---anincreaseingof1%increasesthecostofequityby1%Doesnotexplicitlyconsiderrisk14-53AdvantagesandDisadvantagesoTheSMLApproachUsethefollowinginformationtocomputeourcostofequityRisk-freerate,RfMarketriskpremium,E(RM)–RfSystematicriskofasset,14-54TheSMLApproachUsethefollowExample-SMLSupposeyourcompanyhasanequitybetaof.58,andthecurrentrisk-freerateis6.1%.Iftheexpectedmarketriskpremiumis8.6%,whatisyourcostofequitycapital?RE=6.1+.58(8.6)=11.1%SincewecameupwithsimilarnumbersusingboththedividendgrowthmodelandtheSMLapproach,weshouldfeelgoodaboutourestimate14-55Example-SMLSupposeyourcompAdvantagesandDisadvantagesofSMLAdvantagesExplicitlyadjustsforsystematicriskApplicabletoallcompanies,aslongaswecanestimatebetaDisadvantagesHavetoestimatetheexpectedmarketriskpremium,whichdoesvaryovertimeHavetoestimatebeta,whichalsovariesovertimeWeareusingthepasttopredictthefuture,whichisnotalwaysreliable14-56AdvantagesandDisadvantagesoExample–CostofEquitySupposeourcompanyhasabetaof1.5.Themarketriskpremiumisexpectedtobe9%,andthecurrentrisk-freerateis6%.Wehaveusedanalysts’estimatestodeterminethatthemarketbelievesourdividendswillgrowat6%peryearandourlastdividendwas$2.Ourstockiscurrentlysellingfor$15.65.Whatisourcostofequity?UsingSML:RE=6%+1.5(9%)=19.5%UsingDGM:RE=[2(1.06)/15.65]+.06=19.55%14-57Example–CostofEquitySupposCostofDebtThecostofdebtistherequiredreturnonourcompany’sdebtWeusuallyfocusonthecostoflong-termdebtorbondsTherequiredreturnisbestestimatedbycomputingtheyield-to-maturityontheexistingdebtWemayalsouseestimatesofcurrentratesbasedonthebondratingweexpectwhenweissuenewdebtThecostofdebtisNOTthecouponrate14-58CostofDebtThecostofdebtiExample:CostofDebtSupposewehaveabondissuecurrentlyoutstandingthathas25yearslefttomaturity.Thecouponrateis9%,andcouponsarepaidsemiannually.Thebondiscurrentlysellingfor$908.72per$1,000bond.Whatisthecostofdebt?N=50;PMT=45;FV=1000;PV=-908.72;CPTI/Y=5%;YTM=5(2)=10%14-59Example:CostofDebtSupposewCostofPreferredStockRemindersPreferredstockgenerallypaysaconstantdividendeachperiodDividendsareexpectedtobepaideveryperiodforeverPreferredstockisaperpetuity,sowetaketheperpetuityformula,rearrangeandsolveforRPRP=D/P014-60CostofPreferredStockRemindeExample:CostofPreferredStockYourcompanyhaspreferredstockthathasanannualdividendof$3.Ifthecurrentpriceis$25,whatisthecostofpreferredstock?RP=3/25=12%14-61Example:CostofPreferredStoTheWeightedAverageCostofCapitalWecanusetheindividualcostsofcapitalthatwehavecomputedtogetour“average”costofcapitalforthefirm.This“average”istherequiredreturnonthefirm’sassets,basedonthemarket’sperceptionoftheriskofthoseassetsTheweightsaredeterminedbyhowmuchofeachtypeoffinancingisused14-62TheWeightedAverageCostofCCapitalStructureWeightsNotationE=marketvalueofequity=#ofoutstandingsharestimespricepershareD=marketvalueofdebt=#ofoutstandingbondstimesbondpriceV=marketvalueofthefirm=D+EWeightswE=E/V=percentfinancedwithequitywD=D/V=percentfinancedwithdebt14-63CapitalStructureWeightsNotatExample:CapitalStructureWeightsSupposeyouhaveamarketvalueofequityequalto$500millionandamarketvalueofdebtequalto$475million.Whatarethecapitalstructureweights?V=500million+475million=975millionwE=E/V=500/975=.5128=51.28%wD=D/V=475/975=.4872=48.72%14-64Example:CapitalStructureWeiTaxesandtheWACCWeareconcernedwithafter-taxcashflows,sowealsoneedtoconsidertheeffectoftaxesonthevariouscostsofcapitalInterestexpensereducesourtaxliabilityThisreductionintaxesreducesourcostofdebtAfter-taxcostofdebt=RD(1-TC)Dividendsarenottaxdeductible,sothereisnotaximpactonthecostofequityWACC=wERE+wDRD(1-TC)14-65TaxesandtheWACCWeareconceExtendedExample:WACC-IEquityInformation50millionshares$80pershareBeta=1.15Marketriskpremium=9%Risk-freerate=5%DebtInformation$1billioninoutstandingdebt(facevalue)Currentquote=110Couponrate=9%,semiannualcoupons15yearstomaturityTaxrate=40%14-66ExtendedExample:WACC-IEquiExtendedExample:WACC-IIWhatisthecostofequity?RE=5+1.15(9)=15.35%Whatisthecostofdebt?N=30;PV=-1,100;PMT=45;FV=1,000;CPTI/Y=3.9268RD=3.927(2)=7.854%Whatistheafter-taxcostofdebt?RD(1-TC)=7.854(1-.4)=4.712%14-67ExtendedExample:WACC-IIWhaExtendedExample:WACC-IIIWhatarethecapitalstructureweights?E=50million(80)=4billionD=1billion(1.10)=1.1billionV=4+1.1=5.1billionwE=E/V=4/5.1=.7843wD=D/V=1.1/5.1=.2157WhatistheWACC?WACC=.7843(15.35%)+.2157(4.712%)=13.06%14-68ExtendedExample:WACC-IIIWhEastmanChemicalIClickonthewebsurfertogotoYahoo!FinancetogetinformationonEastmanChemical(EMN)UnderProfileandKeyStatistics,youcanfindthefollowinginformation:#ofsharesoutstandingBookvaluepersharePricepershareBetaUnderanalystsestimates,youcanfindanalystsestimatesofearningsgrowth(useasaproxyfordividendgrowth)TheBondssectionatYahoo!FinancecanprovidetheT-billrateUsethisinformation,alongwiththeCAPMandDGMtoestimatethecostofequity14-69EastmanChemicalIClickontheEastmanChemicalIIGotoFINRAtogetmarketinformationonEastmanChemical’sbondissuesEnterEastmanChtofindthebondinformationNotethatyoumaynotbeabletofindinformationonallbondissuesduetotheilliquidityofthebondmarketGototheSECwebsitetogetbookvalueinformationfromthefirm’smostrecent10Q14-70EastmanChemicalIIGotoFINRAEastmanChemicalIIIFindtheweightedaveragecostofthedebtUsemarketvaluesifyouwereabletogettheinformationUsethebookvaluesifmarketinformationwasnotavailableTheyareoftenverycloseComputetheWACCUsemarketvalueweightsifavailable14-71EastmanChemicalIIIFindthewExample:WorktheWeb14-72Example:WorktheWeb14-29Table14.1CostofEquity14-73Table14.1CostofEquity14-30Table14.1CostofDebt14-74Table14.1CostofDebt14-31Table14.1WACC14-75Table14.1WACC14-32DivisionalandProjectCostsofCapitalUsingtheWACCasourdiscountrateisonlyappropriateforprojectsthathavethesameriskasthefirm’scurrentoperationsIfwearelookingataprojectthatdoesNOThavethesameriskasthefirm,thenweneedtodeterminetheappropriatediscountrateforthatprojectDivisionsalsooftenrequireseparate

discountrates14-76DivisionalandProjectCostsoExample:UsingWACC

forAllProjectsWhatwouldhappenifweusetheWACCforallprojectsregardlessofrisk?AssumetheWACC=15%Project RequiredReturn IRRA 20% 17%B 15% 18%C 10% 12%14-77Example:UsingWACC

forAllPThePurePlayApproachFindoneormorecompaniesthatspecializeintheproductorservicethatweareconsideringComputethebetaforeachcompanyTakeanaverageUsethatbetaalongwiththeCAPMtofindtheappropriatereturnforaprojectofthatriskOftendifficulttofindpureplaycompanies14-78ThePurePlayApproachFindoneSubjectiveApproachConsidertheproject’sriskrelativetothefirmoverallIftheprojecthasmoreriskthanthefirm,useadiscountrategreaterthantheWACCIftheprojecthaslessriskthanthefirm,useadiscountratelessthantheWACCYoum