1. Chapter 11 - Capital Budgeting and Risk Analysis
Chapter 12 - Cost of Capital

2. Tujuan Pembelajaran 1 Mahasiswa mampu untuk:
Menjelaskan pengukuran risiko yang tepat untuk tujuan penganggara modal
Menetapkan akseptabilitas dari suatu proyek baru dengan menggunakan baik metode certainty equivalent maupun metode risk-adjusted discount risk
Menjelaskan penggunaan simulasi dan pohon probabilitas untuk mengimitasi kinerja proyek yang sedang dievaluasi

3. Pokok Bahasan 1 Risiko dan keputusan investasi
Metode-metode untuk memasukkan risiko ke dalam penganggaran modal
Pendekatan lain untuk mengevaluasi risiko dalam penganggaran modal

4. Tujuan Pembelajaran 2 Mahasiswa mampu untuk:
Menjelaskan konsep yang mendasari biaya modal perusahaan dan tujuan perhitungannya
Menghitung biaya modal setelah pajak untuk hutang, saham preferen dan saham biasa, serta biaya modal rata-rata tertimbang suatu perusahaan
Menjelaskan prosedur untuk menaksir biaya modal pada perusahaan yang memiliki banyak divisi
Menggunakan biaya modal untuk mengevaluasi investasi baru

5. Pokok Bahasan 2 Biaya Modal: Definisi dan Konsep kunci
Menghitung biaya modal individual
Biaya modal rata-rata tertimbang
Menghitung Biaya Modal Divisi: Kasus Pepsico, Inc.
Menggunakan cost of capital perusahaan untuk mengevaluasi investasi baru

6. Three Measures of a Project’s Risk
Project Standing
Alone Risk
Risk
diversified away
within firm as this
project is combined
with firm’s other
projects and assets.
Project’s
Contribution-
to-Firm Risk
Risk
diversified away
by shareholders as
securities are combined
to form diversified
portfolio.
Systematic Risk

7. Incorporating Risk into Capital Budgeting
Two Methods:
Certainty Equivalent Approach
Risk-Adjusted Discount Rate

8. How can we adjust this model to take risk into account?
NPV = IO
FCFt
(1 + k) t n
t=1 S
Adjust the After-tax Cash Flows (ACFs), or
Adjust the discount rate (k).

9. Certainty Equivalent Approach
Adjusts the risky after-tax cash flows to certain cash flows.
The idea:
Risky Certainty Certain
Cash X Equivalent = Cash
Flow Factor (a) Flow

10. Certainty Equivalent Approach
Risky Certainty Certain Cash X Equivalent = Cash Flow Factor (a) Flow Risky “safe” $ $950

11. The greater the risk associated with a particular cash flow, the smaller the CE factor.

12. Certainty Equivalent Method
NPV = IO
t ACFt
(1 + krf) n
t=1 S t

13. Certainty Equivalent Approach
Steps:
1) Adjust all after-tax cash flows by certainty equivalent factors to get certain cash flows.
2) Discount the certain cash flows by the risk-free rate of interest.

14. Incorporating Risk into Capital Budgeting
Risk-Adjusted Discount Rate

15. How can we adjust this model to take risk into account?
NPV = IO
ACFt
(1 + k) t n
t=1 S
Adjust the discount rate (k).

16. Risk-Adjusted Discount Rate
Simply adjust the discount rate (k) to reflect higher risk.
Riskier projects will use higher risk-adjusted discount rates.
Calculate NPV using the new risk-adjusted discount rate.

17. Risk-Adjusted Discount Rate
NPV = IO
FCFt
(1 + k*) t n
t=1 S

18. Risk-Adjusted Discount Rates
How do we determine the appropriate risk-adjusted discount rate (k*) to use?
Many firms set up risk classes to categorize different types of projects.

19. Risk Classes
Risk RADR Class (k*) Project Type 1 12% Replace equipment, Expand current business 2 14% Related new products 3 16% Unrelated new products 4 24% Research & Development

20. Summary: Risk and Capital Budgeting
You can adjust your capital budgeting methods for projects having different levels of risk by:
Adjusting the discount rate used (risk-adjusted discount rate method),
Measuring the project’s systematic risk,
Analyzing computer simulation methods,
Performing scenario analysis, and
Performing sensitivity analysis.

21. Chapter 12 - Cost of Capital
Ó 2005, Pearson Prentice Hall

22. Where we’ve been...
Basic Skills: (Time value of money, Financial Statements)
Investments: (Stocks, Bonds, Risk and Return)
Corporate Finance: (The Investment Decision - Capital Budgeting)

23. The investment decision
Assets Liabilities & Equity
Current Assets Current Liabilities
Fixed Assets Long-term Debt
Preferred Stock
Common Equity

24. Where we’re going... Corporate Finance: (The Financing Decision)
Cost of capital
Leverage
Capital Structure
Dividends

25. The financing decision
Assets Liabilities & Equity
Current Assets Current Liabilities
Fixed Assets Long-term Debt
Preferred Stock
Common Equity

26. } Capital Structure Assets Liabilities & Equity
Current assets Current Liabilities
Long-term Debt
Preferred Stock
Common Equity }
Capital Structure

27. Ch Cost of Capital
For Investors, the rate of return on a security is a benefit of investing.
For Financial Managers, that same rate of return is a cost of raising funds that are needed to operate the firm.
In other words, the cost of raising funds is the firm’s cost of capital.

28. How can the firm raise capital?
Bonds
Preferred Stock
Common Stock
Each of these offers a rate of return to investors.
This return is a cost to the firm.
“Cost of capital” actually refers to the weighted cost of capital - a weighted average cost of financing sources.

29. Cost of Debt

30. Cost of Debt For the issuing firm, the cost of debt is:
the rate of return required by investors,
adjusted for flotation costs (any costs associated with issuing new bonds), and
adjusted for taxes.

31. Example: Tax effects of financing with debt
with stock with debt
EBIT , ,000
- interest expense (50,000)
EBT , ,000
- taxes (34%) (136,000) (119,000)
EAT , ,000

32. Example: Tax effects of financing with debt
with stock with debt
EBIT , ,000
- interest expense (50,000)
EBT , ,000
- taxes (34%) (136,000) (119,000)
EAT , ,000
Now, suppose the firm pays $50,000 in dividends to the stockholders.

33. Example: Tax effects of financing with debt
with stock with debt
EBIT , ,000
- interest expense (50,000)
EBT , ,000
- taxes (34%) (136,000) (119,000)
EAT , ,000
- dividends (50,000)
Retained earnings , ,000

34. 1 .066 = .10 (1 - .34) = - After-tax Before-tax Marginal
% cost of % cost of x tax
Debt Debt rate
Kd = kd (1 - T)
= ( ) 1 = -

35. Example: Cost of Debt
Prescott Corporation issues a $1,000 par, 20 year bond paying the market rate of 10%. Coupons are semiannual. The bond will sell for par since it pays the market rate, but flotation costs amount to $50 per bond.
What is the pre-tax and after-tax cost of debt for Prescott Corporation?

36. Pre-tax cost of debt: (using TVM)
P/Y = 2 N = 40
PMT = -50
FV = So, a 10% bond
PV = costs the firm
solve: I = 10.61% = kd only 7% (with
After-tax cost of debt: flotation costs)
Kd = kd (1 - T) since the interest
Kd = ( ) is tax deductible.
Kd = = 7%

37. Cost of Preferred Stock
Finding the cost of preferred stock is similar to finding the rate of return (from Chapter 8), except that we have to consider the flotation costs associated with issuing preferred stock.

38. Cost of Preferred Stock
Recall:
kp = =
From the firm’s point of view:
kp = =
NPo = price - flotation costs! D Po
Dividend
Price D
NPo
Dividend
Net Price

39. Example: Cost of Preferred
If Prescott Corporation issues preferred stock, it will pay a dividend of $8 per year and should be valued at $75 per share. If flotation costs amount to $1 per share, what is the cost of preferred stock for Prescott?

40. Cost of Preferred Stock
NPo
Dividend
Net Price
kp = =
= = %
8.00
74.00

41. Cost of Common Stock There are two sources of Common Equity:
1) Internal common equity (retained earnings).
2) External common equity (new common stock issue).
Do these two sources have the same cost?

42. Cost of Internal Equity
Since the stockholders own the firm’s retained earnings, the cost is simply the stockholders’ required rate of return.
Why?
If managers are investing stockholders’ funds, stockholders will expect to earn an acceptable rate of return.

43. Cost of Internal Equity
1) Dividend Growth Model
kc = g
2) Capital Asset Pricing Model (CAPM)
kj = krf j (km - krf ) D1 Po b

44. Cost of External Equity
Dividend Growth Model
knc = g D1
NPo
Net proceeds to the firm
after flotation costs!

45. Weighted Cost of Capital
The weighted cost of capital is just the weighted average cost of all of the financing sources.

46. Weighted Cost of Capital
Source Cost Structure
debt % %
preferred % %
common % %

47. Weighted Cost of Capital (20% debt, 10% preferred, 70% common)
.20 (6%) (10%) (16%)
= 13.4%

48. Penutup
Tugas