【正文】 Aswath Damodaran 1 Capital Structure: Finding the Right Financing Mix Aswath Damodaran 2 The Big Picture.. Aswath Damodaran 3 Pathways to the Optimal ? The Cost of Capital Approach: The optimal debt ratio is the one that minimizes the cost of capital for a firm. ? The Enhanced Cost of Capital approach: The optimal debt ratio is the one that generates the best bination of (low) cost of capital and (high) operating ine. ? The Adjusted Present Value Approach: The optimal debt ratio is the one that maximizes the overall value of the firm. ? The Sector Approach: The optimal debt ratio is the one that brings the firm closes to its peer group in terms of financing mix. ? The Life Cycle Approach: The optimal debt ratio is the one that best suits where the firm is in its life cycle. Aswath Damodaran 4 I. The Cost of Capital Approach ? Value of a Firm = Present Value of Cash Flows to the Firm, discounted back at the cost of capital. ? If the cash flows to the firm are held constant, and the cost of capital is minimized, the value of the firm will be maximized. Aswath Damodaran 5 Measuring Cost of Capital ? It will depend upon: ? (a) the ponents of financing: Debt, Equity or Preferred stock ? (b) the cost of each ponent ? In summary, the cost of capital is the cost of each ponent weighted by its relative market value. WACC = ke (E/(D+E)) + kd (D/(D+E)) Aswath Damodaran 6 Recapping the Measurement of cost of capital ? The cost of debt is the market interest rate that the firm has to pay on its borrowing. It will depend upon three ponents (a) The general level of interest rates (b) The default premium (c) The firm39。s tax rate ? The cost of equity is 1. the required rate of return given the risk 2. inclusive of both dividend yield and price appreciation ? The weights attached to debt and equity have to be market value weights, not book value weights. Aswath Damodaran 7 Costs of Debt amp。 Equity A recent article in an Asian business magazine argued that equity was cheaper than debt, because dividend yields are much lower than interest rates on debt. Do you agree with this statement? ? Yes ? No Can equity ever be cheaper than debt? ? Yes ? No Aswath Damodaran 8 Applying Cost of Capital Approach: The Textbook Example ??E xp e c t e d C a s h fl ow t o f i r m n e xt y e a r( Cos t o f c a p i t a l g) ? 20 0 ( 1 . 03 )( Cos t of c a pi t a l g)Aswath Damodaran 9 The Ushaped Cost of Capital Graph… Aswath Damodaran 10 Current Cost of Capital: Disney ? The beta for Disney?s stock in May 2020 was . The T. bond rate at that time was %. Using an estimated equity risk premium of 6%, we estimated the cost of equity for Disney to be %: Cost of Equity = % + (6%) = % ? Disney?s bond rating in May 2020 was A, and based on this rating, the estimated pretax cost of debt for Disney is 6%. Using a marginal tax rate of 38%, the aftertax cost of debt for Disney is %. AfterTax Cost of Debt = % (1 – ) = % ? The cost of capital was calculated using these costs and the weights based on market values of equity (45,193) and debt (16,682): Cost of capital = ?? % 45 , 19 3( 16 , 68 2 + 45 , 19 3) ? 3 . 72 % 16 , 68 2( 16 , 68 2 + 45 , 19 3) ? 7 . 51 %Aswath Damodaran 11 Mechanics of Cost of Capital Estimation 1. Estimate the Cost of Equity at different levels of debt: Equity will bee riskier Beta will increase Cost of Equity will increase. Estimation will use levered beta calculation 2. Estimate the Cost of Debt at different levels of debt: Default risk will go up and bond ratings will go down as debt goes up Cost of Debt will increase. To estimating bond ratings, we will use the interest coverage ratio (EBIT/Interest expense) 3. Estimate the Cost of Capital at different levels of debt 4. Calculate the effect on Firm Value and Stock Price. Aswath Damodaran 12 Laying the groundwork: 1. Estimate the unlevered beta for the firm ? To get to the unlevered beta, we can start with the levered beta () and work back to an unlevered beta: Unlevered beta = ? Alternatively, we can back to the source and estimate it from the betas of the businesses. ??L e v e r e d B e t a1 + (1 t) D e b tE q u i t y????????????= 0 .9 0 1 11 + (1 .3 8 ) 1 6 ,6 8 245, 193?????? ??????? 0 . 7 3 33Aswath Damodaran 13 2. Get Disney’s current financials… Aswath Damodaran 14 I. Cost of Equity Aswath Damodaran 15 Estimating Cost of Debt Start with the current market value of the firm = 45,193 + $16,682 = $61,875 million D/(D+E) % % Debt to capital D/E % % D/E = 10/90 = .1111 $ Debt $0 $6,188 10% of $61,875 EBITDA $8,422 $8,422 Same as 0% debt Depreciation $1,593 $1,593 Same as 0% debt EBIT $6,829 $6,829 Same as 0% debt Interest $0 $294 Pretax cost of debt * $ Debt Pretax Int. cov ∞ EBIT/ Interest Expenses Likely Rating AAA AAA From Ratings table Pretax cost of debt % % Riskless Rate + Spread Aswath Damodaran 16 The Ratings Table rate in early 2020 = % Aswath Damodaran 17 A Test: Can you do the 30% level? D/(D + E) % % 30% D/E % % $ Debt $6,188 $12,375 EBITDA $8,422 $8,422 Depreciation $1,593 $1,593 EBIT $6,829 $6,829 Interest $294 $588 Pretax int. cov Likely rating AAA AAA Pretax cost of debt % % Aswath Damodaran 18 Bond Ratings, Cost of Debt and Debt Ratios Aswath Damodaran 19 Stated versus Effective Tax Rates ? You need taxable ine for interest to provide a tax savings. Note that the EBIT at Disney is $6,829 million. As long as interest expenses are less than $6,829 million, interest expenses remain fully taxdeductible and earn the 38% tax benefit. At an 80% debt ratio, the interest expenses are $6,683 million and the tax benefit is therefore