Management need to understand
the cost of capital to select
long-term investments after assessing
term investments after assessing
their acceptability and relative
Gitman & Zutter (2012:358)
The cost of capital represents the firm’s cost of financing and is the minimum rate of return that a project must earn to increase firm value.
firm value.
A firm’s cost of capital is estimated at a given point in time and reflects the
expected average future cost of funds over the long run.
A firm is currently faced with an investment opportunity.
- Best project available today: Cost $100,000
Life 20 years Life 20 years IRR = 7%
Cost of least-cost financing source available, Debt = 6%
Best project available 1 week later: Cost $100,000
Life 20 years IRR = 7%
IRR = 7%
Cost of least-cost financing source available: Equity =14%
Assuming that a 50-50 mix of debt and
equity is targeted, the weighted
average cost here would be 10%:
(50% x 6%) + (50% x 14%)
(50% x 6%) + (50% x 14%)
Mengapa perhitungan “weighted average cost of capital” diperlukan?
• Suatu pendekatan sederhana untuk evaluasi
investasi
• Evaluasi secara keseluruhan mengenai
pengambilan keputusan suatu investasi agar pengambilan keputusan suatu investasi agar dapat meningkatkan nilai perusahaan, dalam hal ini memilih projek yang memberikan return
yang lebih besar daripada weighted average cost of financing (or WACC).
Long-term sources of funds
the
permanent financing:
1. long-term debt
2. Preferred stock
3. Common stock equity: Common stock
and Retained earnings.
WEIGHTED AVERAGE COST
OF CAPITAL (WACC)
Overall cost of capital: biaya modal
rata-rata dari modal/dana jangka
panjang yang digunakan
perusahaan untuk
perusahaan untuk
Brealey, Myers & Marcus (2004:322)
The company cost of capital is a weighted
average of the returns demanded by
debt and equity investors.
The weighted average is the expected rate
The weighted average is the expected rate
of return investors would demand on a
portfolio of all the firm’s outstanding
securities.
Mengapa penting:
1. Biaya modal akan menentukan
penawaran dana kepada
perusahaan
2. Biaya modal akan mempengaruhi
2. Biaya modal akan mempengaruhi
struktur modal dan kebijakan
dividen
WACC ditentukan oleh:
1. Biaya sumber dana secara
individual
2. Bobot sumber dana dalam struktur
modal
Biaya modal secara individual:
1. Biaya pinjaman jangka panjang
2. Biaya saham preferen
3. Biaya saham biasa: laba ditahan
3. Biaya saham biasa: laba ditahan
The Cost of Long-Term Debt
Dapat dihitung melalui salah satu cara:
– Persamaan biaya /cost quotations
– Menghitung biaya /Calculating the cost – Memperkirakan biaya/
– Memperkirakan biaya/
Cost of Debt
Duchess Corporation, a major hardware manufacturer, is contemplating selling bonds with a par value of $ 1,000 of 20-year, 9% coupon. The firm sell the bonds year, 9% coupon. The firm sell the bonds at $ 980. Flotation costs are 2% or $ 20.
The net proceeds to the firm for each bond is therefore $ 960 ($ 980 - $ 20).
Persamaan biaya:
Net proceeds dari penjualan obligasi sama dengan nilai per lembar nya, dan biaya sebelum pajak akan sama dengan tingkat bunga kupon
Menghitung biaya
Dilakukan dengan menghitung internal rate of return
(IRR),dengan cara: (a) trial and error, (b) kalkulator finansial, atau (c) spreadsheet.
Find the after-tax cost of debt for Duchess assuming it has a 40% tax rate:
rd = 9.4% (1- 40%) = 5.6%
This suggests that the after-tax cost of This suggests that the after-tax cost of
The Cost of Preferred Stock
Duchess Corporation is contemplating
issuance of a 10% preferred stock that is expected to sell for its $87 per share par value. The cost of issuing and selling the value. The cost of issuing and selling the stock expected to be $5 per share.
The Cost of Common Stock
• The cost of common stock equity is therate at which investors discount the expected dividends of the firm to
determine its share value. determine its share value.
• Estimasi cost of common equity: the
constant-growth valuation model, dan capital asset pricing model (CAPM).
• Using the constant-growth valuation
(Gordon) model :
rs = D1/Po + g
• Estimate the cost of common equity using
the CAPM: r
The constant-growth valuation
(Gordon) model
Duchess Corporation wishes to determine its cost of common stock equity. The
market price of its common stock is $ 50 per share. The firm expects to pay
per share. The firm expects to pay
dividend of $ 4 at the end of the coming year. The dividend paid out the
outstanding stock over the past 6 years were as follows:
Year Dividend 2012 $ 3.80 2011 $ 3.62 2010 $ 3.47 2010 $ 3.47 2009 $ 3.33 2008 $ 3.12 2007 $ 2.97
g = 5% P0 = $ 50
D1 = $ 4
• CAPM memperhitungkan risiko
perusahaan yaitu beta, sedangkan The constant-growth valuation (Gordon) model tidak memperhitungkan risiko.
• The constant-growth valuation
(Gordon) model menggunakan harga pasar (P0) sebagai tingkat risk-return yang diharapkan.
• Cost of Retained Earnings (ke)
– Constant-Growth Model
For example, assume a firm has just paid a dividend of $2.50 per share, expects dividends to grow at 10% $2.50 per share, expects dividends to grow at 10% indefinitely, and is currently selling for $50.00 per share.
D1 = $ 2.50 (1+ 10%) = $ 2.75
– Security Market Line Approach
rs = rF + b(rM - rF).
For example, if the 3-month T-bill rate is
currently 5.0%, the market risk premium is 9%, and the firm’s beta is 1.20, the firm’s cost of
retained earnings will be:
• The previous example indicates that our
estimate of the cost of retained earnings is
somewhere between 15.5% and 15.8%. At this point, we could either choose one or the other estimate or average the two.
estimate or average the two.
• Using some managerial judgment and preferring
to err on the high side, we will use 15.8% as our final estimate of the cost of retained earnings.
• Cost of New Issues of Common Stock
(rn)
rn = = D1/Nn + g
Continuing with the previous example, how much would Continuing with the previous example, how much would it cost the firm to raise new equity if flotation costs
amount to $4.00 per share?
Capital Structure Weights
•
For example, assume the market
value of the firm’s debt is $40 million,
the market value of the firm’s
preferred stock is $10 million, and the
preferred stock is $10 million, and the
market value of the firm’s equity is
•
Dividing each component by the total
of $100 million gives us market value
weights of 40% debt, 10% preferred,
and 50% common.
WACC = ka = wiki + wpkp + wskn
The weights in the above equation are intended to represent a specific financing mix (where wi to represent a specific financing mix (where wi = % of debt, wp = % of preferred, and ws= % of common).
Using the costs previously calculated along with the market value weights, we may calculate the weighted average cost of capital as follows:
WACC =
0.40(5.6%) + 0.10(10.6%) + 0.50(15.8%) = 11,2%
•
This assumes the firm has
sufficient retained earnings to
fund any anticipated investment
fund any anticipated investment
projects.
WACC
• Cost of debt = 5,6%• Cost of preferred stock = 10,6% • Cost of retained earnings = 15,8% • Cost of new common stock = 16% • Cost of new common stock = 16% • Source of capital:
- Long term debt 40% - Preferred stock 10%
Capital Structure Weights:
• One method uses book values from the
firm’s balance sheet. For example, to estimate the weight for debt, simply
divide the book value of the firm’s long-term debt by the book value of its total term debt by the book value of its total assets.
• A second method uses the market values of
the firm’s debt and equity. To find the market value proportion of debt, simply multiply the price of the firm’s bonds by multiply the price of the firm’s bonds by the number outstanding. This is equal to the total market value of the firm’s debt.