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1
資本結構Financial Leverage and Capital Structure Policy
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How to decide the optional capital structure?
What’s the objective?maximize firm valuemaximize firm valueminimize WACC
A particular debt/equity ratio represents the optional capital structure if it results in the lowest possible WACC.
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Financial Leverage 財務槓桿/ Financial Risk 財務風險
Financial leverage affects the payoffs to stockholders.
An example:Panel A: Current capital structure: no debtRecession Expected ExpansionEBIT 500000 1000000 1500000interest 0 0 0net income 500000 1000000 1500000ROE 6.25% 12.50% 18.75%EPS 1.25 2.5 3.75
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Panel B: Proposed capital structure: debt = 4 million
Recession Expected ExpansionEBIT 500000 1000000 1500000interest 400000 400000 400000net income 100000 600000 1100000ROE 2.50% 15.00% 27.50%EPS 0.5 3 5.5
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EPS vs. EBIT 每股盈餘無異分析EPS with debt
Good no debt
No good
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Break-even point
EPS will be the same for both capital structures:
800000
200000
40000
400000*
EBIT
EBITEBIT
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Example
Before: 200,000 shares * $20 @ share = $4,000,000Debt 1,000,000After 3,000,000
/20
150,000 shares
360000
150000
40000
200000*
EBIT
EBITEBIT
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Conclusion
The effect of financial leverage depends on the firm’s EBIT. When EBIT is relatively high, leverage is beneficial.Shareholders are exposed to more risk under the proposed capital structure since the EPS and ROE are much more sensitive to change in EBIT.
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Question
Because of the impact that financial leverage has on both the expected return to stockholders and the riskness of the stock, capital structure is an important consideration.Answer: no.∵Shareholders can adjust the amount of financial leverage by borrowing and lending on their own. The use of personal borrowing to alter the degree of financial leverage is called homemade leverage.
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Homemade leverage
Panel A: proposed capital structure
Recession Expected ExpansionEPS 0.5 3 5.5Earnings for 100 shares 50 300 550Net cost 100*20=2000
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Panel B: original capital structure and homemade leverage
Recession Expected ExpansionEPS 1.25 2.5 3.75Earnings for 200 shares 250 500 750Less: interest on 2000 at 10% 200 200 200Net earnings 50 300 550Net cost 200*20-amount borrowed=4000-2000=2000
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Investors can always increase financial leverage themselves to create a different pattern of payoffs. It thus makes no different whether a firm restructure the capital structure.There is nothing special about corporate borrowing because investors can borrow or lend on their own. As a result, whichever capital structure a firm chooses, the stock price will be the same.
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M&M proposition I: Modigliani and Miller
The value of the firm is independent of its capital structure.Example:
• .firm value distribution: stockholders vs. debtholders.
• .whole milk: cream vs. skim milk.• .pie: more pieces, but not more pizza. The siz
e of the pizza does not depend on how it is sliced.
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M&M proposition II
A firm’s cost of equity is a positive linear function of its capital structure.
assuming no taxDEA R
V
DR
V
ERWACC
E
DRRRR DAAE
RE
RE
WACCRD
D/E
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M&M propositions with corporate tax
Properties of debttax benefit vs. bankruptcy cost
Example:Firm U: unlevered, Firm L: levered.Assuming two firms are identical on the left-hand sid
e of the balance sheet, only different on capital structure. Firm U Firm L
EBIT 1000 1000Interest 0 80Taxable income 1000 920Taxed(30%) 300 276Net income 700 644
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The interest tax shield
Cash flow to stockholders and bondholders
Cash flows from assets Firm U Firm LEBIT 1000 1000-taxes 300 276Total 700 724
Cash flow Firm U Firm Lto stockholders 700 644to bondholders 0 80Total 700 724
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$80*30%=24: This tax saving is called interest tax shieldThe value of tax shield is
present value of the interest tax shield =
M&M proposition I with tax
Suppose , which we call is as the unlevered cost of capital.
3001000*3.008.0
08.0*1000*03
08.0
24PV
DTRRDT CDDC ***
DTVV CUL *
7000
1.0
7001*
U
CU R
TEBITV
73001000*3.07000* DTVV CUL
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The analysis implies that, once we include taxes, the optimal capital structure is 100% debt.
DTVV CUL *
T c * D
V u
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M&M proposition II with tax
Without debt, the WACC is 10%, and, with debt, the WACC is 9.6%. The firm is better off with debt.
E
TDRRRR C
DUUE
1
%22.10
6300
3.01100008.01.01.0
ER
CDE TRV
DR
V
EWACC 1
%6.93.01%87300
1000%22.10
7300
6300WACC
20
Example: 1.0R ,2.0R 500,D ,34.0T ,52.151 DUC EBIT
Q : W h a t i s t h e v a l u e o f e q u i t y ?W h a t i s t h e c o s t o f e q u i t y ?W h a t i s t h e W A C C ?
500
2.0
100
2.0
34.01*52.1511*
U
CU R
TEBITV
670500*34.0500* DTVV CUL
T h e v a l u e o f e q u i t y : 170500670 DVE L
F r o m M & M p r o p o s i t i o n I I , t h e c o s t o f e q u i t y :
E
TDRRRR C
DUUE
1
%4.39
170
34.015001.02.02.0
ER
T h e W A C C i s :
CDE TRV
DR
V
EWACC 1
%92.1434.01%10670
500%4.39
670
170WACC
21
RE
WACCRD
D/E
22
Debt has tax benefit, but also has cost, bankruptcy cost.Bankruptcy costs:Direct bankruptcy costIndirect bankruptcy cost
DTVV CUL *
b a n k r u p t c y c o s tT c * D t r u e f i r m v a l u e
V u
23
RE
RuWACCRD
D/E