公司理財教學資料-chap016-資料課件

Chapter16 FinancialLeverageandCapitalStructurePolicy10/6/2023 Chapter1610/6/20231ChapterOutlineTheCapitalStructureQuestionTheEffectofFinancialLeverageCapitalStructureandtheCostofEquityCapitalM&MPropositionsIandIIwithCorporateTaxesBankruptcyCostsOptimalCapitalStructureThePieAgainThePecking-OrderTheoryObservedCapitalStructuresAQuickLookattheBankruptcyProcess16-210/6/2023ChapterOutlineTheCapitalStr2CapitalRestructuringWearegoingtolookathowchangesincapitalstructureaffectthevalueofthefirm,allelseequalCapitalrestructuringinvolveschangingtheamountofleverageafirmhaswithoutchangingthefirm’sassetsThefirmcanincreaseleveragebyissuingdebtandrepurchasingoutstandingsharesThefirmcandecreaseleveragebyissuingnewsharesandretiringoutstandingdebt16-310/6/2023CapitalRestructuringWearego3ChoosingaCapitalStructureWhatistheprimarygoaloffinancialmanagers?MaximizestockholderwealthWewanttochoosethecapitalstructurethatwillmaximizestockholderwealthWecanmaximizestockholderwealthbymaximizingthevalueofthefirmorminimizingtheWACC16-410/6/2023ChoosingaCapitalStructureWh4TheEffectofLeverageHowdoesleverageaffecttheEPSandROEofafirm?Whenweincreasetheamountofdebtfinancing,weincreasethefixedinterestexpenseIfwehaveareallygoodyear,thenwepayourfixedcostandwehavemoreleftoverforourstockholdersIfwehaveareallybadyear,westillhavetopayourfixedcostsandwehavelessleftoverforourstockholdersLeverageamplifiesthevariationinbothEPSandROE16-510/6/2023TheEffectofLeverageHowdoes5Example:FinancialLeverage,EPSandROE–PartIWewillignoretheeffectoftaxesatthisstageWhathappenstoEPSandROEwhenweissuedebtandbuybacksharesofstock?16-610/6/2023Example:FinancialLeverage,E6Example:FinancialLeverage,EPSandROE–PartIIVariabilityinROECurrent:ROErangesfrom6%to20%Proposed:ROErangesfrom2%to30%VariabilityinEPSCurrent:EPSrangesfrom$0.60to$2.00Proposed:EPSrangesfrom$0.20to$3.00ThevariabilityinbothROEandEPSincreaseswhenfinancialleverageisincreased16-710/6/2023Example:FinancialLeverage,E7Break-EvenEBITFindEBITwhereEPSisthesameunderboththecurrentandproposedcapitalstructuresIfweexpectEBITtobegreaterthanthebreak-evenpoint,thenleveragemaybebeneficialtoourstockholdersIfweexpectEBITtobelessthanthebreak-evenpoint,thenleverageisdetrimentaltoourstockholders16-810/6/2023Break-EvenEBITFindEBITwhere8Example:Break-EvenEBIT16-910/6/2023Example:Break-EvenEBIT16-9109Example:HomemadeLeverage

andROECurrentCapitalStructureInvestorborrows$500anduses$500ofherowntobuy100sharesofstockPayoffs:Recession:100(0.60)-.1(500)=$10Expected:100(1.30)-.1(500)=$80Expansion:100(2.00)-.1(500)=$150Mirrorsthepayoffsfrompurchasing50sharesofthefirmundertheproposedcapitalstructureProposedCapitalStructureInvestorbuys$250worthofstock(25shares)and$250worthofbondspaying10%.Payoffs:Recession:25(.20)+.1(250)=$30Expected:25(1.60)+.1(250)=$65Expansion:25(3.00)+.1(250)=$100Mirrorsthepayoffsfrompurchasing50sharesunderthecurrentcapitalstructure16-1010/6/2023Example:HomemadeLeverage

an10CapitalStructureTheoryModiglianiandMiller(M&M)TheoryofCapitalStructurePropositionI–firmvaluePropositionII–WACCThevalueofthefirmisdeterminedbythecashflowstothefirmandtheriskoftheassetsChangingfirmvalueChangetheriskofthecashflowsChangethecashflows16-1110/6/2023CapitalStructureTheoryModigl11CapitalStructureTheoryUnderThreeSpecialCasesCaseI–AssumptionsNocorporateorpersonaltaxesNobankruptcycostsCaseII–AssumptionsCorporatetaxes,butnopersonaltaxesNobankruptcycostsCaseIII–AssumptionsCorporatetaxes,butnopersonaltaxesBankruptcycosts16-1210/6/2023CapitalStructureTheoryUnder12CaseI–PropositionsIandIIPropositionIThevalueofthefirmisNOTaffectedbychangesinthecapitalstructureThecashflowsofthefirmdonotchange;therefore,valuedoesn’tchangePropositionIITheWACCofthefirmisNOTaffectedbycapitalstructure16-1310/6/2023CaseI–PropositionsIandII13CaseI-EquationsWACC=RA=(E/V)RE+(D/V)RD

RE=RA+(RA–RD)(D/E)

RAisthe“cost”ofthefirm’sbusinessrisk,i.e.,theriskofthefirm’sassets(RA–RD)(D/E)isthe“cost”ofthefirm’sfinancialrisk,i.e.,theadditionalreturnrequiredbystockholderstocompensatefortheriskofleverage16-1410/6/2023CaseI-EquationsWACC=RA=14Figure16.316-1510/6/2023Figure16.316-1510/6/202315CaseI-ExampleDataRequiredreturnonassets=16%;costofdebt=10%;percentofdebt=45%Whatisthecostofequity?RE=16+(16-10)(.45/.55)=20.91%Supposeinsteadthatthecostofequityis25%,whatisthedebt-to-equityratio?25=16+(16-10)(D/E)D/E=(25-16)/(16-10)=1.5Basedonthisinformation,whatisthepercentofequityinthefirm?E/V=1/2.5=40%16-1610/6/2023CaseI-ExampleData16-1610/6/16TheCAPM,theSMLandPropositionIIHowdoesfinancialleverageaffectsystematicrisk?CAPM:RA=Rf+

A(RM–Rf)Where

Aisthefirm’sassetbetaandmeasuresthesystematicriskofthefirm’sassetsPropositionIIReplaceRAwiththeCAPMandassumethatthedebtisriskless(RD=Rf)RE=Rf+

A(1+D/E)(RM–Rf)16-1710/6/2023TheCAPM,theSMLandProposit17BusinessRiskand

FinancialRiskRE=Rf+

A(1+D/E)(RM–Rf)CAPM:RE=Rf+

E(RM–Rf)

E=A(1+D/E)Therefore,thesystematicriskofthestockdependson:Systematicriskoftheassets,A,(Businessrisk)Levelofleverage,D/E,(Financialrisk)16-1810/6/2023BusinessRiskand

FinancialR18CaseII–CashFlowInterestistaxdeductibleTherefore,whenafirmaddsdebt,itreducestaxes,allelseequalThereductionintaxesincreasesthecashflowofthefirmHowshouldanincreaseincashflowsaffectthevalueofthefirm?16-1910/6/2023CaseII–CashFlowInterestis19CaseII-ExampleUnleveredFirmLeveredFirmEBIT5,0005,000Interest0500TaxableIncome5,0004,500Taxes(34%)1,7001,530NetIncome3,3002,970CFFA3,3003,47016-2010/6/2023CaseII-ExampleUnleveredFir20InterestTaxShieldAnnualinteresttaxshieldTaxratetimesinterestpayment6,250in8%debt=500ininterestexpenseAnnualtaxshield=.34(500)=170PresentvalueofannualinteresttaxshieldAssumeperpetualdebtforsimplicityPV=170/.08=2,125PV=D(RD)(TC)/RD=DTC=6,250(.34)=2,12516-2110/6/2023InterestTaxShieldAnnualinte21CaseII–PropositionIThevalueofthefirmincreasesbythepresentvalueoftheannualinteresttaxshieldValueofaleveredfirm=valueofanunleveredfirm+PVofinteresttaxshieldValueofequity=Valueofthefirm–ValueofdebtAssumingperpetualcashflowsVU=EBIT(1-T)/RUVL=VU+DTC16-2210/6/2023CaseII–PropositionITheval22Example:CaseII–PropositionIDataEBIT=25million;Taxrate=35%;Debt=$75million;Costofdebt=9%;Unleveredcostofcapital=12%VU=25(1-.35)/.12=$135.42millionVL=135.42+75(.35)=$161.67millionE=161.67–75=$86.67million16-2310/6/2023Example:CaseII–Proposition23Figure16.416-2410/6/2023Figure16.416-2410/6/202324CaseII–PropositionIITheWACCdecreasesasD/EincreasesbecauseofthegovernmentsubsidyoninterestpaymentsRA=(E/V)RE+(D/V)(RD)(1-TC)RE=RU+(RU–RD)(D/E)(1-TC)ExampleRE=12+(12-9)(75/86.67)(1-.35)=13.69%RA=(86.67/161.67)(13.69)+(75/161.67)(9)(1-.35)

RA=10.05%16-2510/6/2023CaseII–PropositionIITheWA25Example:CaseII–

PropositionIISupposethatthefirmchangesitscapitalstructuresothatthedebt-to-equityratiobecomes1.Whatwillhappentothecostofequityunderthenewcapitalstructure?RE=12+(12-9)(1)(1-.35)=13.95%Whatwillhappentotheweightedaveragecostofcapital?RA=.5(13.95)+.5(9)(1-.35)=9.9%16-2610/6/2023Example:CaseII–

Propositio26Figure16.516-2710/6/2023Figure16.516-2710/6/202327CaseIIINowweaddbankruptcycostsAstheD/Eratioincreases,theprobabilityofbankruptcyincreasesThisincreasedprobabilitywillincreasetheexpectedbankruptcycostsAtsomepoint,theadditionalvalueoftheinteresttaxshieldwillbeoffsetbytheincreaseinexpectedbankruptcycostAtthispoint,thevalueofthefirmwillstarttodecrease,andtheWACCwillstarttoincreaseasmoredebtisadded16-2810/6/2023CaseIIINowweaddbankruptcy28BankruptcyCostsDirectcostsLegalandadministrativecostsUltimatelycausebondholderstoincuradditionallossesDisincentivetodebtfinancingFinancialdistressSignificantproblemsinmeetingdebtobligationsFirmsthatexperiencefinancialdistressdonotnecessarilyfileforbankruptcy16-2910/6/2023BankruptcyCostsDirectcosts1629MoreBankruptcyCostsIndirectbankruptcycostsLargerthandirectcosts,butmoredifficulttomeasureandestimateStockholderswanttoavoidaformalbankruptcyfilingBondholderswanttokeepexistingassetsintactsotheycanatleastreceivethatmoneyAssetslosevalueasmanagementspendstimeworryingaboutavoidingbankruptcyinsteadofrunningthebusinessThefirmmayalsolosesales,experienceinterruptedoperationsandlosevaluableemployees16-3010/6/2023MoreBankruptcyCostsIndirect30Figure16.616-3110/6/2023Figure16.616-3110/6/202331Figure16.716-3210/6/2023Figure16.716-3210/6/202332ConclusionsCaseI–notaxesorbankruptcycostsNooptimalcapitalstructureCaseII–corporatetaxesbutnobankruptcycostsOptimalcapitalstructureisalmost100%debtEachadditionaldollarofdebtincreasesthecashflowofthefirmCaseIII–corporatetaxesandbankruptcycostsOptimalcapitalstructureispartdebtandpartequityOccurswherethebenefitfromanadditionaldollarofdebtisjustoffsetbytheincreaseinexpectedbankruptcycosts16-3310/6/2023ConclusionsCaseI–notaxeso33Figure17.816-3410/6/2023Figure17.816-3410/6/202334ManagerialRecommendationsThetaxbenefitisonlyimportantifthefirmhasalargetaxliabilityRiskoffinancialdistressThegreatertheriskoffinancialdistress,thelessdebtwillbeoptimalforthefirmThecostoffinancialdistressvariesacrossfirmsandindustries,andasamanageryouneedtounderstandthecostforyourindustry16-3510/6/2023ManagerialRecommendationsThe35Figure16.916-3610/6/2023Figure16.916-3610/6/202336TheValueoftheFirmValueofthefirm=marketedclaims+nonmarketedclaimsMarketedclaimsaretheclaimsofstockholdersandbondholdersNonmarketedclaimsaretheclaimsofthegovernmentandotherpotentialstakeholdersTheoverallvalueofthefirmisunaffectedbychangesincapitalstructureThedivisionofvaluebetweenmarketedclaimsandnonmarketedclaimsmaybeimpactedbycapitalstructuredecisions16-3710/6/2023TheValueoftheFirmValueof37ThePecking-OrderTheoryTheorystatingthatfirmsprefertoissuedebtratherthanequityifinternalfinancingisinsufficient.Rule1UseinternalfinancingfirstRule2Issuedebtnext,newequitylastThepecking-ordertheoryisatoddswiththetradeofftheory:ThereisnotargetD/EratioProfitablefirmsuselessdebtCompanieslikefinancialslack16-3810/6/2023ThePecking-OrderTheoryTheory38ObservedCapitalStructureCapitalstructuredoesdifferbyindustryDifferencesaccordingtoCostofCapital2019YearbookbyIbbotsonAssociates,Inc.LowestlevelsofdebtComputerswith5.61%debtDrugswith7.25%debtHighestlevelsofdebtCabletelevisionwith162.03%debtAirlineswith129.40%debt16-3910/6/2023ObservedCapitalStructureCapi39BankruptcyProcess–PartIBusinessfailure–businesshasterminatedwithalosstocreditorsLegalbankruptcy–petitionfederalcourtforbankruptcyTechnicalinsolvency–firmisunabletomeetdebtobligationsAccountinginsolvency–bookvalueofequityisnegative16-4010/6