Presentation on theme: "Corporate Valuation: A Guide for Brokers, Managers and Investors"— Presentation transcript:
1 Corporate Valuation: A Guide for Brokers, Managers and Investors Dr. Mounther Barakat Al OmariSecurities and Commodities AuthorityAbu Dhabi - UAEDecember
2 تحليل الشركات وتسعير الاسهم دليل للوسطاء والمدراء والمستثمرين د. منذر بركات العمريهيئة الاوراق المالية والسلع – ابو ظبيدولة الامارات العربية المتحدة2006
3 فيما يلي مقدمة هامة للمحللين الماليين ولمسعري الشركات Introduction مقدمةThe following is an important introduction for stock analysts and evaluators.This introduction is intended to provide stock analysts with the tools they need to carryout their analysis.فيما يلي مقدمة هامة للمحللين الماليين ولمسعري الشركاتتحوي هذه المقدمة على ادوات هامة لا يستطيع المحلل المالي ان يقوم بوظيفته بدونها
4 Financial Goals of the Corporation هدف الشركة The primary financial goal is shareholder wealth maximization, which translates to maximizing stock price.Do firms have any responsibilities to society at large?Is stock price maximization good or bad for society?Should firms behave ethically?
5 Is stock price maximization the same as profit maximization No, despite a generally high correlation amongst stock price, EPS, and cash flow.Current stock price relies upon current earnings, as well as future earnings and cash flow.Some actions may cause an increase in earnings, yet cause the stock price to decrease (and vice versa).
6 Factors that affect stock price العوامل التي تؤثر بسعر السهم Projected cash flows to shareholdersTiming of the cash flow streamRiskiness of the cash flows
7 Basic Valuation Model نموذج التسعير الاولي To estimate an asset’s value, one estimates the cash flow for each period t (CFt), the life of the asset (n), and the appropriate discount rate (k)Throughout the course, we discuss how to estimate the inputs and how financial management is used to improve them and thus maximize a firm’s value.
8 Decisions made by financial managers: Factors that Affect the Level and Riskiness of Cash Flows العوامل المؤثرة بقيمة وخطورة وتوقيت التدفقات النقديةDecisions made by financial managers:Investment decisionsFinancing decisions (the relative use of debt financing)Dividend policy decisionsThe external environment
9 Financial Statements, Cash Flow, and Taxes القوائم المالية، التدفقات النقدية والضرائب Balance sheetIncome statementStatement of cash flowsAccounting income vs. cash flowMVA and EVAThe tax system
10 The Annual Report التقرير السنوي Balance sheet – provides a snapshot of a firm’s financial position at one point in time.Income statement – summarizes a firm’s revenues and expenses over a given period of time.Statement of retained earnings – shows how much of the firm’s earnings were retained, rather than paid out as dividends.Statement of cash flows – reports the impact of a firm’s activities on cash flows over a given period of time.
11 Balance Sheet: Assets قائمة المركز المالي - الاصول CashA/RInventoriesTotal CAGross FALess: Dep.Net FATotal Assets20027,282632,1601,287,3601,926,8021,202,950263,160939,7902,866,592200157,600351,200715,2001,124,000491,000146,200344,8001,468,800
12 Balance sheet: Liabilities and Equity قائمة المركز المالي – الخصوم وحقوق الملكية Accts payableNotes payableAccrualsTotal CLLong-term debtCommon stockRetained earningsTotal EquityTotal L & E2002524,160636,808489,6001,650,568723,432460,00032,592492,5922,866,5922001145,600200,000136,000481,600323,432203,768663,7681,468,800
13 Income statement قائمة الدخل SalesCOGSOther expensesEBITDADepr. & Amort.EBITInterest Exp.EBTTaxesNet income20026,034,0005,528,000519,988(13,988)116,960(130,948)136,012(266,960)(106,784)(160,176)20013,432,0002,864,000358,672209,32818,900190,42843,828146,60058,64087,960
14 Other data معلومات أخرى No. of sharesEPSDPSStock price2002100,000-$1.602$0.11$2.252001$0.88$0.22$8.50
15 Did the expansion create additional net operating after taxes (NOPAT) NOPAT = EBIT (1 – Tax rate)NOPAT02 = -$130,948(1 – 0.4)= -$130,948(0.6)= -$78,569NOPAT01 = $114,257
16 NOWC = Current - Non-interest What effect did the expansion have on net operating working capital? حسابات صافي رأس المال العملNOWC = Current Non-interestassets bearing CLNOWC02 = ($7,282 + $632,160 + $1,287,360) – ( $524,160 + $489,600)= $913,042NOWC01 = $842,400
17 What effect did the expansion have on operating capital Operating capital = NOWC + Net Fixed AssetsOperating Capital02 = $913,042 + $939,790= $1,852,832Operating Capital01 = $1,187,200
18 What is your assessment of the expansion’s effect on operations SalesNOPATNOWCOperating capitalNet Income2002$6,034,000-$78,569$913,042$1,852,832-$160,1762001$3,432,000$114,257$842,400$1,187,200$87,960
19 What effect did the expansion have on net cash flow and operating cash flow? حسابات التدفقات النقدية NCF02 = NI + Dep = ($160,176) + $116,960= -$43,216NCF01 = $87,960 + $18,900 = $106,860OCF02 = NOPAT + Dep= ($78,569) + $116,960= $38,391OCF01 = $114,257 + $18,900= $133,157
20 What was the free cash flow (FCF) for 2002? حساب التدفق النقدي الحر FCF = OCF – Gross capital investment- OR -FCF02 = NOPAT – Net capital investment= -$78,569 – ($1,852,832 - $1,187,200)= -$744,201Is negative free cash flow always a bad sign?
21 Economic Value Added (EVA) حساب القيمة المضافة EVA = After-tax __ After-taxOperating Income Capital costs= Funds Available __ Cost ofto Investors Capital Used= NOPAT – After-tax Cost of Capital
22 EVA Concepts مفهوم القيمة الاقتصادية المضافة In order to generate positive EVA, a firm has to more than just cover operating costs. It must also provide a return to those who have provided the firm with capital.EVA takes into account the total cost of capital, which includes the cost of equity.
23 EVA02 = NOPAT – (A-T cost of capital) (Capital) What is the firm’s EVA? Assume the firm’s after-tax percentage cost of capital was 10% in 2000 and 13% in حساب القيمة الاقتصادية المضافةEVA02 = NOPAT – (A-T cost of capital) (Capital)= -$78,569 – (0.13)($1,852,832)= -$78,569 - $240,868= -$319,437EVA01 = $114,257 – (0.10)($1,187,200)= $114,257 - $118,720= -$4,463
24 MVA = Market value __ Equity capital of equity supplied Did the expansion increase or decrease MVA? حساب القيمة السوقية المضافةMVA = Market value __ Equity capitalof equity suppliedDuring the last year, the stock price has decreased 73%. As a consequence, the market value of equity has declined, and therefore MVA has declined, as well.
25 Corporate and Personal Taxes ضرائب الشركات والافراد وأثرها على قيمة الشركة وأسهمها Have a progressive structure (the higher the income, the higher the marginal tax rate).CorporationsRates are at 0% unless there are special provisions for certain companies like Oil and foreign ones.IndividualsRates 0% for individuals, again unless there are special provisions.Inexistence of taxes does not change the mechanics of our work, it will change the results.
26 Tax treatment of various uses and sources of funds أثر الضرائب على التدفقات النقدية الداخلة والخارجة Interest paid – tax deductible for corporations (paid out of pre-tax income), but usually not for individuals.Interest earned - taxableDividends paid – paid out of after-tax income.Dividends received – not taxed individuals (“double taxation”).Capital gains not taxable
27 Calculating Key Multipliers حساب المضاعفات - مثال P/E = Price / Earnings per share= $12.17 / $1.014 = 12.0xP/CF = Price / Cash flow per share= $12.17 / [($ $117.0) ÷ 250]= 8.21x
28 Calculating Key Multipliers حساب المضاعفات - مثال M/B = Mkt price per share / Book value per share= $12.17 / ($1,952 / 250) = 1.56x200320022001Ind.P/E12.0x-1.4x9.7x14.2xP/CF8.21x-5.2x8.0x11.0xM/B1.56x0.5x1.3x2.4x
29 Analyzing the multipliers تحليل المضاعفات P/E: How much investors are willing to pay for $1 of earnings.P/CF: How much investors are willing to pay for $1 of cash flow.M/B: How much investors are willing to pay for $1 of book value equity.For each ratio, the higher the number, the better.P/E and M/B are high if ROE is high and risk is low.
30 Trend analysis تحليل النمطية Analyzes a firm’s financial ratios over timeCan be used to estimate the likelihood of improvement or deterioration in financial condition.
31 Potential uses of freed up cash استخدامات التدفق النقدي الحر Repurchase stockExpand businessReduce debtAll these actions would likely improve the stock price.
32 The Financial Environment: البيئة المالية للشركة المراد تحليلها وتقييمها Financial marketsTypes of financial institutionsDeterminants of interest ratesYield curves
33 What is a market? ما هو السوق A market is a venue where goods and services are exchanged.A financial market is a place where individuals and organizations wanting to borrow funds are brought together with those having a surplus of funds.
34 Types of financial markets أنواع الاسواق المالية Physical assets vs. Financial assetsMoney vs. CapitalPrimary vs. SecondarySpot vs. FuturesPublic vs. Private
35 How is capital transferred between savers and borrowers Direct transfersInvestment banking houseFinancial intermediaries
36 Types of financial intermediaries أنواع الوسطاء الماليين Commercial banksSavings and loan associationsMutual savings banksCredit unionsPension fundsLife insurance companiesMutual funds
37 Physical location stock exchanges vs Physical location stock exchanges vs. Electronic dealer-based markets الفرق بين السوق المنظمة والغير منظمةAuction market vs. Dealer market (Exchanges vs. OTC)Differences are narrowing
38 The cost of money تكلفة رأس المال The price, or cost, of debt capital is the interest rate.The price, or cost, of equity capital is the required return. The required return investors expect is composed of compensation in the form of dividends and capital gains.
39 What four factors affect the cost of money Production opportunitiesTime preferences for consumptionRiskExpected inflation
40 “Nominal” vs. “Real” rates العائد الاسمي والحقيقي k = represents any nominal ratek* = represents the “real” risk-free rate of interest, if there was no inflation. Typically ranges from 1% to 4% per year.kRF = represents the rate of interest on Treasury securities.
41 Determinants of interest rates محددات سعر الفائدة (العائد) k = k* + IP + DRP + LP + MRPk = required return on a debt securityk* = real risk-free rate of interestIP = inflation premiumDRP = default risk premiumLP = liquidity premiumMRP = maturity risk premium
42 Premiums added to k* for different types of debt مقارنة علاوات المخاطر المختلفة IPMRPDRPLPS-T TreasuryL-T TreasuryS-T CorporateL-T Corporate
43 Yield curve and the term structure of interest rates منحنى العائد وعلاقة الفائدة بالاستحقاق Term structure – relationship between interest rates (or yields) and maturities.The yield curve is a graph of the term structure.
44 Hypothetical yield curve منحنى عائد افتراضي Years toMaturityReal risk-free rate51015InterestRate (%)Maturity risk premiumInflation premiumAn upward sloping yield curve.Upward slope due to an increase in expected inflation and increasing maturity risk premium.
45 The Yield Curve منحنى العائد Corporate yield curves are higher than that of Treasury securities, though not necessarily parallel to the Treasury curve.The spread between corporate and Treasury yield curves widens as the corporate bond rating decreases.
46 The Yield Curve منحنى العائد InterestRate (%)15BB-Rated10AAA-RatedTreasuryYield Curve6.0%55.9%5.2%Years toMaturity15101520
47 Risk and Rates of Return المخاطر والعائد Stand-alone riskPortfolio riskRisk & return: CAPM / SML
48 Investment returns العائد على الاستثمار The rate of return on an investment can be calculated as follows:(Amount received – Amount invested)Return = ________________________Amount investedFor example, if $1,000 is invested and $1,100 is returned after one year, the rate of return for this investment is:($1,100 - $1,000) / $1,000 = 10%.
49 What is investment risk? مخاطر الاستثمار Two types of investment riskStand-alone riskPortfolio riskInvestment risk is related to the probability of earning a low or negative actual return.The greater the chance of lower than expected or negative returns, the riskier the investment.
50 Probability distributions التوزيع الاحتمالي A listing of all possible outcomes, and the probability of each occurrence.Can be shown graphically.Expected Rate of ReturnRate ofReturn (%)10015-70Firm XFirm Y
51 Risk: Calculating the standard deviation حساب المخاطر باستخدام الانحراف المعياري
52 Standard deviation as a measure of risk الانحراف المعياري كمقياس للخطورة Standard deviation (σi) measures total, or stand-alone, risk.The larger σi is, the lower the probability that actual returns will be closer to expected returns.Larger σi is associated with a wider probability distribution of returns.
53 Coefficient of Variation (CV) معامل التشتت كمقياس للخطورة A standardized measure of dispersion about the expected value, that shows the risk per unit of return.
54 Investor attitude towards risk درجة تحمل المستثمرين للمخاطر Risk aversion – assumes investors dislike risk and require higher rates of return to encourage them to hold riskier securities.Risk premium – the difference between the return on a risky asset and less risky asset, which serves as compensation for investors to hold riskier securities.
55 Company-Specific Risk Illustrating diversification effects of a stock portfolio اثر التنويع على المخاطر# Stocks in Portfolio,000+Company-Specific RiskMarket Risk20Stand-Alone Risk, spsp (%)35
56 Breaking down sources of risk مصادر المخاطر Stand-alone risk = Market risk + Firm-specific riskMarket risk – portion of a security’s stand-alone risk that cannot be eliminated through diversification. Measured by beta.Firm-specific risk – portion of a security’s stand-alone risk that can be eliminated through proper diversification.
57 Capital Asset Pricing Model نموذج تسعير الاصول الرأسمالية Model based upon concept that a stock’s required rate of return is equal to the risk-free rate of return plus a risk premium that reflects the riskiness of the stock after diversification.Primary conclusion: The relevant riskiness of a stock is its contribution to the riskiness of a well-diversified portfolio.
58 Beta معامل بيتا كمقياس للخطورة Measures a stock’s market risk, and shows a stock’s volatility relative to the market.Indicates how risky a stock is if the stock is held in a well-diversified portfolio.
59 Calculating betas حساب معامل بيتا باستخدام Excel Run a regression of past returns of a security against past returns on the market.The slope of the regression line (sometimes called the security’s characteristic line) is defined as the beta coefficient for the security.
60 Illustrating the calculation of beta مثال - حساب معامل بيتا باستخدام Excel See PADICO-PALTEL.XLS
61 Comments on beta ملاحظات على معامل بيتا If beta = 1.0, the security is just as risky as the average stock.If beta > 1.0, the security is riskier than average.If beta < 1.0, the security is less risky than average.Most stocks have betas in the range of 0.5 to 1.5.
62 Can the beta of a security be negative? معامل بيتا قد يكون سالبا Yes, if the correlation between Stock i and the market is negative (i.e., ρi,m < 0).If the correlation is negative, the regression line would slope downward, and the beta would be negative.However, a negative beta is highly unlikely.
64 The Security Market Line (SML): خط السوق SML: ki = kRF + (kM – kRF) βiAssume kRF = 8% and kM = 15%.The market (or equity) risk premium is RPM = kM – kRF = 15% – 8% = 7%.
65 What is the market risk premium? ما هي علاوة مخاطر السوق Additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk.Its size depends on the perceived risk of the stock market and investors’ degree of risk aversion.Varies from year to year, but most estimates suggest that it ranges between 4% and 8% per year.
66 Time Value of Money القيمة الزمنية للنقود Future valuePresent valueAnnuitiesRates of return
67 Time lines خط الزمن – اين انت؟ 123i%CF0CF1CF2CF3Show the timing of cash flows.Tick marks occur at the end of periods, so Time 0 is today; Time 1 is the end of the first period (year, month, etc.) or the beginning of the second period.
68 Time lines خط الزمن – مثال 10012i%$100 lump sum due in 2 years100123i%3 year $100 ordinary annuity
69 Time lines خط الزمن – مثال 1005075123i%-50Uneven cash flow stream
70 Future value (FV) القيمة المستقبلية Finding the FV of a cash flow or series of cash flows when compound interest is applied is called compounding.FV can be solved by using the arithmetic, financial calculator, and spreadsheet methods.FV = ?12310%100
71 Future value (FV) القيمة المستقبلية After 1 year:FV1 = PV ( 1 + i ) = $100 (1.10) = $110.00After 2 years:FV2 = PV ( 1 + i )2 = $100 (1.10) =$121.00After 3 years:FV3 = PV ( 1 + i )3 = $100 (1.10) =$133.10After n years (general case):FVn = PV ( 1 + i )n
72 Present value (PV) القيمة الحالية Finding the PV of a cash flow or series of cash flows when compound interest is applied is called discounting (the reverse of compounding).The PV shows the value of cash flows in terms of today’s purchasing power.12310%PV = ?100
73 Present value (PV) القيمة الحالية Solve the general FV equation for PV:PV = FVn / ( 1 + i )nPV = FV3 / ( 1 + i )3= $100 / ( 1.10 )3= $75.13
74 Ordinary annuity and an annuity due الدفعات المنتظمة اول الفترة وآخرها PMT123i%PMT123i%Annuity Due
75 PV of uneven cash flow stream? القيمة الحالية لدفعات غير منتظمة 10013002310%-50490.91247.93225.39-34.15= PV
76 Bonds and Their Valuation السندات وتسعيرها Key features of bondsBond valuationMeasuring yieldAssessing risk
77 What is a bond? ما هو السند؟ A long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond.
78 What is a bond? ما هو السند؟ Par value – face amount of the bond, which is paid at maturity (assume $1,000).Coupon interest rate – stated interest rate (generally fixed) paid by the issuer. Multiply by par to get dollar payment of interest.Maturity date – years until the bond must be repaid.Issue date – when the bond was issued.Yield to maturity - rate of return earned on a bond held until maturity (also called the “promised yield”).
79 The value of financial assets قيمة (سعر) الاصول المالية 12nkCF1CFnCF2Value...
80 What is the opportunity cost of debt capital? حساب تكلفة السندات The discount rate (ki ) is the opportunity cost of capital, and is the rate that could be earned on alternative investments of equal risk.ki = k* + IP + MRP + DRP + LP
81 Bond valuation – an example تسعير السندات - مثال 12nk100,000VB = ?...
82 What is the YTM on a bond? حساب العائد المطلوب على سند Must find the kd that solves this model.
84 An example: Current and capital gains yield حساب العائد على سند - مثال Find the current yield and the capital gains yield for a 10-year, 9% annual coupon bond that sells for $887, and has a face value of $1,000.Current yield = $90 / $887= = 10.15%
85 An example: Current and capital gains yield حساب العائد على سند - مثال YTM = Current yield + Capital gains yieldCGY = YTM – CY= 10.91% %= 0.76%Could also find the expected price one year from now and divide the change in price by the beginning price, which gives the same answer.
86 Evaluating default risk: Bond ratings تصنيف السندات حسب خطورتها Investment GradeJunk BondsMoody’sAaa Aa A BaaBa B Caa CS & PAAA AA A BBBBB B CCC DBond ratings are designed to reflect the probability of a bond issue going into default.
87 Financial performance Factors affecting default risk and bond ratings العوامل التي تؤثر على خطورة السنداتFinancial performanceDebt ratioTIE ratioCurrent ratioBond contract provisionsSecured vs. Unsecured debtSenior vs. subordinated debtGuarantee and sinking fund provisionsDebt maturity
88 Factors affecting default risk and bond ratings العوامل التي تؤثر على خطورة السندات Earnings stabilityRegulatory environmentPotential antitrust or product liabilitiesPension liabilitiesPotential labor problemsAccounting policies
89 Priority of claims in liquidation من له الاولوية عند التصفية Secured creditors from sales of secured assets.Trustee’s costsWages, subject to limitsTaxesUnfunded pension liabilitiesUnsecured creditorsPreferred stockCommon stock
90 The Cost of Capital تكلفة رأس المال Sources of capitalComponent costsWACCAdjusting for flotation costsAdjusting for risk
92 WACC = wdkd(1-T) + wpkp + wcks Calculating the weighted average cost of capital حساب المعدل المرجح لرأس المالWACC = wdkd(1-T) + wpkp + wcksThe w’s refer to the firm’s capital structure weights.The k’s refer to the cost of each component.
93 Should our analysis focus on before-tax or after-tax capital costs Stockholders focus on A-T CFs. Therefore, we should focus on A-T capital costs, i.e. use A-T costs of capital in WACC. Only kd needs adjustment, because interest is tax deductible.
94 Should our analysis focus on historical (embedded) costs or new (marginal) costs? تحسب تكلفة رأس المال حديا (أي على الاموال الجديدة وليس القديمة)The cost of capital is used primarily to make decisions that involve raising new capital. So, focus on today’s marginal costs (for WACC).
95 How are the weights determined? حساب الاوزان WACC = wdkd(1-T) + wpkp + wcksUse accounting numbers or market value (book vs. market weights)?Use actual numbers or target capital structure?
96 Component cost of debt حساب تكلفة الدين WACC = wdkd(1-T) + wpkp + wckskd is the marginal cost of debt capital.The yield to maturity on outstanding L-T debt is often used as a measure of kd.Why tax-adjust, i.e. why kd(1-T)?
97 Component cost of debt حساب تكلفة الدين Interest is tax deductible, soA-T kd = B-T kd (1-T)= 10% ( ) = 6%Use nominal rate.Flotation costs are small, so ignore them.
98 Component cost of preferred stock حساب تكلفة الاسهم الممتازة WACC = wdkd(1-T) + wpkp + wckskp is the marginal cost of preferred stock.The rate of return investors require on the firm’s preferred stock.
99 Component cost of preferred stock حساب تكلفة الاسهم الممتازة The cost of preferred stock can be solved by using this formula:kp = Dp / Pp= $10 / $111.10= 9%
100 Component cost of preferred stock حساب تكلفة الاسهم الممتازة Preferred dividends are not tax-deductible, so no tax adjustments necessary. Just use kp.Nominal kp is used.Our calculation ignores possible flotation costs.
101 Preferred stock risk خطورة الاسهم الممتازة More risky; company not required to pay preferred dividend.However, firms try to pay preferred dividend. Otherwise, (1) cannot pay common dividend, (2) difficult to raise additional funds, (3) preferred stockholders may gain control of firm.
102 Component cost of equity حساب تكلفة الاسهم العادية WACC = wdkd(1-T) + wpkp + wcksks is the marginal cost of common equity using retained earnings.The rate of return investors require on the firm’s common equity using new equity is ke.
103 Why is there a cost for retained earnings? حساب تكلفة الارباح المحجوزة Earnings can be reinvested or paid out as dividends.Investors could buy other securities, earn a return.If earnings are retained, there is an opportunity cost (the return that stockholders could earn on alternative investments of equal risk).Investors could buy similar stocks and earn ks.Firm could repurchase its own stock and earn ks.Therefore, ks is the cost of retained earnings.
104 Component cost of equity حساب تكلفة الاسهم العادية CAPM: ks = kRF + (kM – kRF) βDCF: ks = D1 / P0 + gOwn-Bond-Yield-Plus-Risk Premium:ks = kd + RP
105 Component cost of equity حساب تكلفة الاسهم العادية - مثال If the kRF = 7%, RPM = 6%, and the firm’s beta is 1.2, what’s the cost of common equity based upon the CAPM?ks = kRF + (kM – kRF) β= 7.0% + (6.0%)1.2 = 14.2%
106 Component cost of equity حساب تكلفة الاسهم العادية - مثال If D0 = $4.19, P0 = $50, and g = 5%, what’s the cost of common equity based upon the DCF approach?D1 = D0 (1+g)D1 = $4.19 ( )D1 = $4.3995ks = D1 / P0 + g= $ / $= 13.8%
107 What is the expected future growth rate? حساب معدل النمو The firm has been earning 15% on equity (ROE = 15%) and retaining 35% of its earnings (dividend payout = 65%). This situation is expected to continue.g = ( 1 – Payout ) (ROE)= (0.35) (15%)= 5.25%Very close to the g that was given before.
108 Component cost of equity حساب تكلفة الاسهم العادية - مثال If kd = 10% and RP = 4%, what is ks using the own-bond-yield-plus-risk-premium method?This RP is not the same as the CAPM RPM.This method produces a ballpark estimate of ks, and can serve as a useful check.ks = kd + RPks = 10.0% + 4.0% = 14.0%
109 Component cost of equity حساب تكلفة الاسهم العادية - مثال Method EstimateCAPM %DCF %kd + RP %Average %
110 Component cost of equity حساب تكلفة الاسهم العادية Why is the cost of retained earnings cheaper than the cost of issuing new common stock?When a company issues new common stock they also have to pay flotation costs to the underwriter.Issuing new common stock may send a negative signal to the capital markets, which may depress the stock price.
111 Component cost of equity حساب تكلفة الاسهم العادية - مثال If issuing new common stock incurs a flotation cost of 15% of the proceeds, what is ke?
112 Flotation costs تكاليف الاصدار Flotation costs depend on the risk of the firm and the type of capital being raised.The flotation costs are highest for common equity. However, since most firms issue equity infrequently, the per-project cost is fairly small.We will frequently ignore flotation costs when calculating the WACC.
113 Ignoring floatation costs, what is the firm’s WACC WACC = wdkd(1-T) + wpkp + wcks= 0.3(10%)(0.6) + 0.1(9%) + 0.6(14%)= 1.8% + 0.9% + 8.4%= 11.1%
114 The Hamada Equation معادلة العالم حمادة βL = βU[ 1 + (1 - T) (D/E)]Suppose, the risk-free rate is 6%, as is the market risk premium. The unlevered beta of the firm is If the total assets are $2,000,000.
115 The Hamada Equation معادلة العالم حمادة - مثال If D = $250,βL = 1.0 [ 1 + (0.6)($250/$1,750) ]βL =ks = kRF + (kM – kRF) βLks = 6.0% + (6.0%)ks = 12.51%
116 Calculating levered betas and costs of equity علاقة استخدام الرفع المالي على معامل بيتا وتكلفة الاسهمks12.00%12.5113.2014.1615.60Amount borrowed$2505007501,000D/A ratio0.00%12.5025.0037.5050.00D/E ratio0.00%14.2933.3360.00100.00Levered Beta1.001.091.201.361.60
117 Determining the minimum WACC تحديد أقل تكلفة لرأس المال ks12.00%12.5113.2014.1615.60kd (1 – T)0.00%4.805.406.908.40Amount borrowed$2505007501,000D/A ratio0.00%12.5025.0037.5050.00E/A ratio100.00%87.5075.0062.5050.00WACC12.00%11.5511.2511.4412.00* Amount borrowed expressed in terms of thousands of dollars
118 Determining the stock price maximizing capital structure تحديد هيكل رأس المال الذي ينتج اعلى سعر للسهمAmountBorrowedDPSkPs$$3.0012.00%$25.00250,0003.2612.5126.03500,0003.5513.2026.89750,0003.7714.1626.591,000,0003.9015.6025.00
119 Financial Planning and Forecasting التنبؤ والتخطيط المالي – اساسيات التسعير Forecasting salesProjecting the assets and internally generated fundsProjecting outside funds neededDeciding how to raise funds
120 Comprehensive example مثال في التنبؤ Balance sheet (2002), in millions of dollarsCash & sec. $ Accts. pay. &accruals $ 100Accounts rec Notes payableInventories Total CL $ 200Total CA $ L-T debt 100Common stock 500Net fixed Retainedassets earningsTotal assets $1,000 Total claims $1,000
121 Comprehensive example مثال في التنبؤ Income statement (2002), in millions of dollarsSales $2,000.00Less: Var. costs (60%) 1,200.00Fixed costsEBIT $InterestEBT $Taxes (40%)Net income $Dividends (30%) $15.12Add’n to RE $35.28
122 Key assumptions معطيات Operating at full capacity in 2002.Each type of asset grows proportionally with sales.Payables and accruals grow proportionally with sales.2002 profit margin (2.52%) and payout (30%) will be maintained.Sales are expected to increase by $500 million. (%DS = 25%)
123 Determining additional funds needed AFN حساب الحاجة الى تمويل اضافي AFN = (A*/S0)ΔS – (L*/S0) ΔS – M(S1)(RR)= ($1,000/$2,000)($500)– ($100/$2,000)($500)– ($2,500)(0.7)= $180.9 million.
124 How shall AFN be raised? كيفية الحصول على الاموال الاضافية The payout ratio will remain at 30 percent (d = 30%; RR = 70%).No new common stock will be issued.Any external funds needed will be raised as debt, 50% notes payable and 50% L-T debt.
125 Forecasted Income Statement (2003) التنبؤ بقائمة الدخل 2002ForecastBasis2003ForecastSales $2, $2,500Less: VC 1, ,500FCEBIT $ $ 125InterestEBT $ $ 109Taxes (40%)Net income $ $Div. (30%) $15 $19Add’n to RE $35 $46
127 Forecasted Balance Sheet (2003) - Liabilities and Equity التنبؤ بقائمة المركز المالي – الخصوم وحقوق الملكيةForecastBasis20031st Pass2002AP/accruals $ $ 125Notes payableTotal CL $ $ 225L-T debtCommon stkRet.earnings *Total claims $1,000 $1,071* From income statement.
128 What is the additional financing needed (AFN) Required increase in assets = $ 250Spontaneous increase in liab. = $Increase in retained earnings = $Total AFN = $ 179NWC must have the assets to generate forecasted sales. The balance sheet must balance, so we must raise $179 million externally.
129 How will the AFN be financed? كيفية تحديد التمويل الاضافي Additional N/P0.5 ($179) = $89.50Additional L-T debtBut this financing will add to interest expense, which will lower NI and retained earnings. We will generally ignore financing feedbacks.
130 Forecasted Balance Sheet (2003) - Assets التنبؤ بقائمة المركز المالي - الاصول بعد حساب التمويل الاضافي20031st Pass20032nd PassAFNCash $ $Accts. recInventoriesTotal CA $ $ 625Net FATotal assets $1,250 $1,250
131 AP/accruals $ 125 - $ 125 Notes payable 100 +89.5 190 Forecasted Balance Sheet (2003) - Liabilities and Equity التنبؤ بقائمة المركز المالي – الخصوم وحقوق الملكية بعد حساب التمويل الاضافي20031st Pass20032nd PassAFNAP/accruals $ $ 125Notes payableTotal CL $ $ 315L-T debtCommon stkRet.earningsTotal claims $1,071 $1,250
132 Why do the AFN equation and financial statement method have different results? Equation method assumes a constant profit margin, a constant dividend payout, and a constant capital structure.Financial statement method is more flexible. More important, it allows different items to grow at different rates.