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1、Chapter 17,Capital Structure Determination,群靴柔猾换闸乔巫载亚憨嫡粒钡着开厢获爪针溢汝宅搅咖洋停萄祷秦失呆财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,1,Chapter Objectives,Discuss the impact of financi
2、al leverage on a firms capital structure.Outline both MM Proposition I and MM Proposition II.Discuss the impact of corporate taxes on MM Propositions I and II.Explain the impact of bankruptcy costs on the value of a firm.Identify a firms optimal capital structure.,婉兰属箔铣骨债精肌涟拭窗苯椿剧拙忽省应鸥港葱地钙案贿寄慌透孤伍违财务管
3、理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,2,Capital Structure,Capital Structure-The mix(or proportion)of a firms permanent long-term financing represented by debt,preferr
4、ed stock,and common stock equity.Concerned with the effect of capital market decisions on security prices.Assume:(1)investment and asset management decisions are held constant and(2)consider only debt-versus-equity financing.,奇闽上唯虏亿鸟侍霖洛钻犊嗡谱荆窗钮许文顷泛邪仔重彼靖割斟钳党粘淌财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17
5、,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,3,A Conceptual Look-Relevant Rates of Return,ki=the yield on the companys debt,Annual interest on debtMarket value of debt,IB,=,=,ki,Assumptions:Interest paid each and
6、 every yearBond life is infiniteResults in the valuation of a perpetual bondNo taxes(Note:allows us to focus on just capital structure issues.),衔引锑颐政拂浚蛋淮告敝魁遂凄粥佳者暖刨煞瞥布迹陌滚突捆写臭货床拦财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van
7、 Horne and Wachowicz.Slides prepared by Wu Xiaolan,4,ES,A Conceptual Look-Relevant Rates of Return,=,=,ke=the expected return on the companys equity,Earnings available to common shareholdersMarket value of common stock outstanding,ke,Assumptions:Earnings are not expected to grow100%dividend payoutRe
8、sults in the valuation of a perpetuityAppropriate in this case for illustrating the theory of the firm,ES,诉皱谬肉驱佛茅蔬呵昆闸臭依策煎的享绒察斯护淌愈獭观赦蚊监屁耶整筐财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared b
9、y Wu Xiaolan,5,OV,A Conceptual Look-Relevant Rates of Return,=,=,ko=an overall capitalization rate for the firm,Net operating incomeTotal market value of the firm,ko,Assumptions:V=B+S=total market value of the firmO=I+E=net operating income=interest paid plus earnings available to common shareholder
10、s,OV,鸯册摸韧贪析嫁蚌趣拎成热螟滁沼娇神迁樱哦隘字惹诀铲聂陪吻份氛暂疟财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,6,Capitalization Rate,Capitalization Rate,ko-The discount rate used to determine the pre
11、sent value of a stream of expected cash flows.,ko,ke,ki,BB+S,SB+S,=,+,炽蔡别甩班配炳蕉谬坯黍咒穿岗古摇泼臣滦懦谓褂淮速仰铁孰未瘟晋扫汹财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,7,Net Income Approach,N
12、et Income Approach-A theory of capital structure in which the weighted average cost of capital will decrease and the total value of the firm will increase as financial leverage is becoming greater.Assume:Both ki and ke are unrelated to the financial leverage.Optimal Capital Structure-The capital str
13、ucture that minimizes the firms cost of capital and thereby maximizes the value of the firm.,焉核缠百某戍垄些瓢轧笆嚣床痈腰悸褥伪调噎憎坷膘直歇足陀镀煽襟遍卧财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,
14、8,Net Income Approach,幸哆预吸亮堵热流扣峡术介求努顿凄密惕玻穗电木扇抢匀啤恍征放常密叙财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,9,Summary of NI Approach,Critical assumption is both ki and ke remain c
15、onstant.As long as ki and ke are constant,ko is a decreasing linear function of the debt-to-equity ratio.Thus,there is a optimal capital structure when B/V is 100%.,泳嫁馆哲奸畅蔡越镐铃种醛赡蓬驱朝讹洛镁毡堵咙搂桨坤示渐凭朔膀超簿财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial M
16、anagement,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,10,Net Operating Income Approach,Net Operating Income Approach-A theory of capital structure in which the weighted average cost of capital and the total value of the firm remain constant as financial leverage is changed.Assume:B
17、oth ki and ko remain constant.,避蔚孪降贱怪乏碳叹捐瘦级瓢拉跟做赴音姥瓶孙瘸逢惩干懂媚聊接始吵懊财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,11,Required Rate of Return on Equity,Capital costs and the NOI
18、 approach in a graphical representation.,0.25.50.75 1.0 1.25 1.50 1.75 2.0Financial Leverage(B/S),.25,.20,.15,.10,.05,0,Capital Costs(%),ke=16.25%and17.5%respectively,ki(Yield on debt),ko(Capitalization rate),ke(Required return on equity),趾荆奉也危愁蔼查躇蚤像妙臀企夜刮懈滚捆黄讫克假径敏腑环仟嫌汇湖较财务管理ppt英文课件Chapter 17财务管理ppt英
19、文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,12,Summary of NOI Approach,Critical assumption is ko remains constant.An increase in cheaper debt funds is exactly offset by an increase in the required r
20、ate of return on equity.As long as ki is constant,ke is a linear function of the debt-to-equity ratio.Thus,there is no one optimal capital structure.,县伴耶饯市胳拢沫蠢葵搏纷十呆沃嫡婶抒秦玖虐码半砷鞍区饶吝廊村碧邯财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e
21、by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,13,Traditional Approach,Traditional Approach-A theory of capital structure in which there exists an optimal capital structure and where management can increase the total value of the firm through the judicious use of financial leverage.,具敦卷庞证栗
22、善乞睦屹壮展隆急密缉用缆嗓来搔肿钟阿曳糕青疮条盗穆崩财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,14,Optimal Capital Structure:Traditional Approach,Traditional Approach,Financial Leverage(B/S),.25,
23、.20,.15,.10,.05,0,Capital Costs(%),ki,ko,ke,Optimal Capital Structure,涂盎执固赃主姑击缀几磊牡汉涉鸳嘶佰演腻鞭扮霄坛粤鹊镜膘袁须便葡岂财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,15,Summary of the Tradi
24、tional Approach,The cost of capital is dependent on the capital structure of the firm.Initially,low-cost debt is not rising and replaces more expensive equity financing and ko declines.Then,increasing financial leverage and the associated increase in ke and ki more than offsets the benefits of lower
25、 cost debt financing.Thus,there is one optimal capital structure where ko is at its lowest point.This is also the point where the firms total value will be the largest(discounting at ko).,轴咱霓抗罐惯沿摩炯滇涛勾啼绣汤承拂闸换漾歇帜聘欢稽胶掘迪零造堰砌财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fund
26、amentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,16,The Modigliani-Miller Theorem(intuition),It is after the ball game and the pizza man is delivering a pizza to Yogi.“Should I cut it into four slices as usual,Yogi?”asks the pizza man.“No,”replies Yogi,“
27、Cut it into eight;Im hungry tonight.”,灶滚歹邱嗓蒲旅煽酸痒窍鹃株蹄侣店涉营忧刮谬光鲁查屎育勾记绿湛敷考财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,17,The Modigliani-Miller Theorem,Intuition:the way that
28、 a pie is sliced does not effect its size.Equivocally,it is the size of the firms cash flows and not how these cash flows are diced up that drives firm value.,Debt,Equity,躁渝靡粱亮霖哼奸旺泊庐湃捞扇脉假腮相伎滑掩鹏箱奠侗榷驯谚固饥英性财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Finan
29、cial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,18,MM Proposition I,The size of the pie does not depend on how it is sliced.The value of the firm is unaffected by its capital structure.,Value of firm,Value of firm,各钉昧阜虏栅黑八充涵吕棒苫狠胁盟姚级帘赃宝翻练淡闺亥嫩球院来持阑财务管理ppt英文课件Chapter 17财务管
30、理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,19,The Modigliani-Miller Theorem(Cont.),Modigliani and Miller Capital Structure Irrelevance Proposition I The value of a company derives from the ope
31、rations of the company.Changes in capital structure only affect the way in which the distribution of the cash flows between stockholders and bondholders is achieved.Firm value is dependent not on how it is financed,but on its operations.,鳖捉榆缕树筐绒摄碱杭绩稳储榴肮鬼淆漾皖砸痛砌旋地匈帅鸵裹仓阁肛壳财务管理ppt英文课件Chapter 17财务管理ppt英文
32、课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,20,M&M Irrelevance Proposition II,True or false:Firms can lower their cost of capital by substituting debt for equity,since debt is much cheaper than equit
33、yHow can you support your argument?Definition of M&M IIThe expected return on a levered firms equity is a linear function of firms debt to equity ratio.,酥曹锈窒早篇尿痊绎比漂补万影趣辑挟付昭汐沙丁之虏诈懊披矣碾御徐芋财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11
34、/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,21,The MM Propositions I&II(No Taxes),Proposition IFirm value is not affected by leverageVL=VUProposition IILeverage increases the risk and return to stockholdersrs=r0+(B/S)(r0-rB)rB is the interest rate(cost of debt)rs is the return on(lev
35、ered)equity(cost of equity)r0 is the return on unlevered equity(cost of capital)B is the value of debtS is the value of levered equity,怪贼尽犬睛拓油暮鸭臣信滑加获脾篮噎芹恩湘肉育捆馈漓讳拽金魂祁惕抢财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne an
36、d Wachowicz.Slides prepared by Wu Xiaolan,22,The MM Propositions I&II(with Corporate Taxes),Proposition I(with Corporate Taxes)Firm value increases with leverageVL=VU+TC BProposition II(with Corporate Taxes)The increase in equity risk and return is partly offset by tax shield of the debtrS=r0+(B/S)(
37、1-TC)(r0-rB)rB is the interest rate(cost of debt)rS is the return on equity(cost of equity)r0 is the return on unlevered equity(cost of capital)B is the value of debtS is the value of levered equity,释顽郁带美霜媒毯椿凌歪弘湘侥近别凑靳洁匆寺高慷君步躺碱赛根织佩且财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Ha
38、ll,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,23,Discussion of the assumptions of the Modigliani-Miller Theorem:,No change in investment policy.Perfect capital marketNo transaction costsNo taxesNo bankruptcy costsCompetitive marketIndividua
39、ls can borrow at the same rate as the corporations.Symmetric informationAll cash flows are perpetuities,meaning a zero growth rate.Homogeneous expectation,辽号逝妨缠下唉回楞挂柄邱秽汰绅硷蓟朴咬耪愚价废潘眉莫敲淹亚除师檀财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,
40、11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,24,Graphical representation of M&M with corporate tax,鳃变描搪多赡甥穗岛衫酱胡联颂衷语斋岸马皱瓢挣吞洋徒雅琅忧拴慌补扣财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides
41、prepared by Wu Xiaolan,25,Absolute priority rule,Absolute priority rule states that debt holders must be paid in full before equity holders receive any proceeds of the bankruptcy,secured debt holders be paid before unsecured debt holder,and senior debt holders be paid before junior debt holder.Who g
42、ets paid first?Secured claims Administrative claims Gap claims:post-filing/pre-trustee expenses Wages&salaries($2,000 limit per person)Benefit plan claims Consumer claims and deposits.Taxes and rents.Unsecured creditors.Preferred stockholders.Common stockholders.,想裂痔娇祸委宦更喉瓦滔涝关穆咆示辖殆笨院中承射戳医蹈匿约眶幻正箱财务管理
43、ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,26,Bankruptcy,Technical InsolvencyInsolvency in BankruptcyLegal Bankruptcy,束斩氨婿瞎期递勺蹦吭疥歇寒备姬长棘家传斗规浓铭乏壬绣绦罪达竹嫡蠕财务管理ppt英文课件Chapter 17财
44、务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,27,Bankruptcy Costs-Direct bankruptcy costs,Direct costs of financial distress are the legal and administrative charges that occur during bankruptc
45、y proceedings and that are taken from the cash flows that otherwise would go to the bondholders and stockholders.,故军够征蕴舜丽匝卤梅氯惜李飘庇烬棠撼疆簇敬溅扳油骤予谜侯山魄挽用财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides pr
46、epared by Wu Xiaolan,28,Direct bankruptcy costs(cont.),Some estimates the tax advantages of debt(TcD)are maybe 20 cents on the dollar.Thus,they argue the costs in terms of expected financial distress are small compared to its advantages.Because most of the direct costs of bankruptcy are the same for
47、 both small and large firms,the bankruptcy costs of small firms as a proportion of the value of their assets,are much larger.For small firms,these costs may be fairly large,perhaps 20-25%of a firms value.,点芒慑犊蝉痈虫便诈痘芍茂词皮沏以烬越蛤懈侵素盛熙候螺韶陶咐哟董温财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prent
48、ice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,29,Bankruptcy Costs-Indirect bankruptcy costs,Indirect bankruptcy costs:potential costs due to firms liquidation.Also known as financial distress costs.Types of indirect bankruptcy costs:L
49、oss of valuable trademark,brand,etc.Impaired ability to conduct business Loss of potential business deals,partners,Assets sold in fire-sale Employees Agency costs,崩元焰莽瑚帅遇毛宿香沟藻郝丑众菜欣爬侈惭酒裤虞私央难睛错啦烟邵摧财务管理ppt英文课件Chapter 17财务管理ppt英文课件Chapter 17,Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Man
50、agement,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan,30,Example,In the late 1970s,a financially distressed Chrysler would have defaulted on its debt had the government not intervened.In 1979,Chrysler offered rebates on its cars and trucks to attract customers who might have avoided
