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    libro de finanzas capital structure

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    libro de finanzas capital structure

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    2 views15 pages

    2016 09 2820161427rwj 17

    Uploaded by

    MiguelCandiaAzocar
    libro de finanzas capital structure

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    of 15
    Chapter |7 Valuation and Capital Budgeting for the Levered Firm Instructors often structure the basic course in corporate france around the two sides of the balance sheet. The lefchand side of the EXECUTIVE SUMMARY 17.1 Adjusted-Present-Value Approach PV) method is best described by the following formula APV = NPV + NPVF In words, the value ofa project toa levered frm (APY) is equa tothe value ofthe project «oan ualevered frm (NPV) pls the net present value ofthe financing sid effect (NPV) One ean generally think of four sie fess 1. The Tax Subsidy to Debt. Tis was discussed in Chapter 15, where we pointed out tha, for perpetual deb, the value ofthe tox subsidy is ZeB. (isthe corporate tax rate, and B material on valuation under corporate taxes in Chapter 15, the APV approach 478 jowers the value ofthe projec sess. The possibilty of financial distress, and bankrptoy Jt financing. As stated inthe previous chapter, financial distress rncing, The interest on debt issued by stat and financing from 2 municipality row at that ate as wel. As with any subsidy, this subsidy adds valve. “While each ofthe preceding four side effects is important, the tax deduction to deb most crtinly has the highest dollar value in actual situations For this reason, te fll ing example considers the tax subsidy, but not the other thee sie effects.” ject ofthe PB. Singer Co, with the following cherscteristcs: ‘Concept ‘Questions ‘Cash inflows: $500,000 per year forthe indefinite future Cash casts: 72% of sales Initial investment: $475,000 To= 3% ry = 20%, where ris the eos of capital for a project of an all-equity fer, If both the project andthe firm are financed with only equity, the project's eash flow is Cath intows $500,000 Cath coste 360,000 (Operating income 14,000 Comore tax (34 wxrats) 47.500 Unlevered eath ow (UCF] 592.400 ‘The distinction in Chapter 4 between present valve and net present vale is import foc this example. As pointed out n Caper 4, the present value ofa projects dee before the inal investment at date Os subtacted. The intial investment i subtracted the calculation of represent value Given a escount rate of 20 percent, the present value ofthe projects $92,400 = $462,000 0.20 ee “The net preseat vue (NPV) ofthe project, thas, he value ofthe project to an all-egiy fi, is ‘$462,000 ~ $475,000 = ~S13,000 ‘Since the NPV is negative, the projec would be rejected by an all-equity firm. ‘Now imagine tat the firm finances the project with exactly $126,229.50 in deb, so the remaining investment of $348,770.50 ($475,000 ~ $126,229.50) is financed with eau ‘The net present value of the projet under leverage, which we call the adjusted pres! ‘aloe, or the APY, is: ABV =NPV +7. XB $29,918 = ~$13,000 + 034 x $126,229.50 im 49 nen financed with some leverage is equal to the value of equity plus the tx shield from the dab, Since this nu be accepted? ‘You may be wondering why we chase such a precise amount of debt Actually, we chose itso that the ratio of debt tothe present value ofthe project under leverage is 0.25. In his example, debt i a fixed proportion ofthe present value of the project, nota fixed proportion of the inital investment of $475,000. This is cosisteat with the goal of target ‘debt to-market-value rato, which we fin in the real world. Frexample, commercial banks ‘typically lend to realestate developers a fixed percentage ofthe appraised market value of 2 project, nota fixed percentage ofthe intial investment. |. How is the APV method applied? 2. What addition ) approach is an altematve captal-budgeting approsch. The for- nting the eas flow from the projet tothe equityholders ofthe equity capital, ry. Fora perpetuity Cash flow from project to equityholders of the levered iam ‘There are three steps tothe FTE approach, 1g Levered Cash Flow (LCF)* rate of 10 percent, the perpetual cash flow to equiyholders in our Co, example is: Cash iniows $500,000.00, Cush costs 360,000.00 Inearese (10% $12622850) =i262.95 Income afer increst 1737705 CCorporace exe (34 ex rat] = 4330820, Leveres cath flow (LCF) 5 exces ‘Alternatively, one ean calculate levered cash flow (LCF) directly from unlevered cash flow (UCF). The key here is that the difference between the cash flow that equityholders 17.3 Weighted-Average-Cost-of-Capital Method ‘$92,400 ~ $8,331.15 = $84,068.85 which is exactly the number we calculated eater. assumed that dhe discount, Formula for rss discount rate, ry. Note 20. As we saw in Chapt rate on unlevered equity, nent ka -Tata-m) Note that our target dabt-to-value rato of 1/4 implies a target debtto-equity ratio ‘Applying the preceding formula to this example, we have: pasta 2006 .20-30 Step 3: Va ‘Tae present value of the project's LCF is LCF _ $84,068.85 DR Since th initial investment is $475,000 and $126,299.50 is borrowed, the frm ‘vance the project $348,770:50(S475,000 ~ $126,229.50) out ofits own cash reserves. het present value of the projec is simply the difference betveen the present value o project's LCF and th investment not borrowed. Thus, the NPV is 5378,688.50 ~ $348,770.50 = S29918 which i identical co the result Found with the APY approach, = $378,688.50 1. How is the FTE method applied? 2. Wine information is needed to ealeulace FTE? weighted averge ind 15, the cost of ui However, with oo st of debt, fi 481 ‘The formula for determining the weighted avecage cost of capital, rancc is Se eeu ‘wee FB SR ‘The weight for equity, $/(S + B), and the weight for debt, B/(S + B), are target get ratios are generally expressed in terms of market values, nt accountng Val tha snother phrase for secounting value is Book value.) ‘The formula calls for discounting the unlevered cash flow of the project (UCF) at the ‘weighted average co I, Fuace: The net present value ofthe projeet ean be written algebraically as (a1) He Prnagy 7 Haevesment If the project is a perpetuity, the net present value is: ucr hatte target debt-to-value ratio of our projects 1/4 andthe cor. implying thatthe weighted average cost of capital is ~ initial investment Rance 4X 0222 +4 % 0.10(0.66) = 0.183 [Note that rec 0.183 is Tower than the cost of equity capital for an al-oquity frm, 0.20. ‘This must always be the case, since debt financing provides a tax subsidy that lowers the average cost of capital. ‘We previously determined the UCF ofthe project to be $92,400, implying tht the pres- ‘ent value ofthe projects 92.400 0.183 £75,000, the NPV of the projects {$504,918 ~ $475,000 = $29,918 ll three approaches yield the same value = $504,918 Since this inital invest In this exam |. How is the WACC method applied? 17.4 A Comparison of the APV, FTE, and WACC Approaches -budgeting techniques in the early chapters ofthis text applied to all-equity fies, Capital budgeting forthe levered firm could not be handled early in the book because the were deferred until the previous two chapters. We leamed ‘here that debt increases firm value through tax benefits but decreases value through bank- ruptey and related cost, Inthis chapter we provide three approaches to capital budgeting forthe levered fim, The assuming ll-equity financing, appears i the denominator. Athi point, the calculation is 482 ‘uns the after-tax cashflow froma project ging (LCF). LCF, which stan ash flow, nique caleulates the project’ after LUCFis placed inthe numerator of he approaches ae rarely diferent neg. Besse uotion ofthe folloving srt “How can is be? How en the ponies lok so erent and yet give he same arse” We lieve at he sry to ane qusins ik hes toh flowing 0 points Ofte hee aporaches, APV and WAC dpa he rete bt epcahes pul he nvr a fw (UCE) in the numer proc cisco these Row a yilingthe vale of te unleveted proce ding te resent value of te tax shed gives the value ofthe projet one Teverage The WAGE approach sours UCF a ro whic tower than reflect te tan bef of verge. The APV approach makes acdsin he present value ote ax shies separate erm tac he ajsment na more uli ay, Her te count ae led Bow ry Atbough ne done prove root inthe txt, ean Be show tat hese Wo au. neat vay have the segunda effet 2 Ent Being Valued. The FTE approach joer stist lace ober iferen: om th ote to For bol the APV andthe WAC apace, the nal invesinem tected oun ia tp (75000 nour earl). However, forthe FTE aproach ol th fm on resent 24877030 © $475,000 ~ 512620. issued oe une the FTE approach ony te fr cash ers (UC ate value, By contrat tre cash fost he fred equals (UCR) ae valid In both he APV and WACC spon TE tre ne of tres pyri, wees UCT rot, the inl invest FTE apc isconespondingl slice ty debt asin ats wa. he FTE apresch products tbe same answer ht tier approaches do, A Suggested G three methods “Thenet present vlue of ou projects exactly the same under ech of thet theory, this should always be the case.’ However, one method usually provide an eas Canes ne Abra Fins Seep et sot 17 Netion a Capel Bagi fre Levee 483 ther, and, in many eases, one or more of the methods are virtually ally. We first consider when it is bes 1 use the WACC and FTE. Doth 75nd race later assumption, either the FTE or the WACC appr

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