panduan pendanaan perusahaan how do we want to finance our firm’s assets? 2002, prentice hall,...

Panduan Pendanaan Perusahaan

How do we want to finance our firm’s assets?

DebtPreferredEquity

2002, Prentice Hall, Inc.

Balance Sheet

Current Current

Assets Liabilities

Debt and

Fixed Preferred

Assets

Shareholders’

Equity

Balance Sheet

Current Current

Assets Liabilities

Debt and

Fixed Preferred

Assets

Shareholders’

Equity

FinancialStructure

Balance Sheet

Current Current

Assets Liabilities

Debt and

Fixed Preferred

Assets

Shareholders’

Equity

Balance Sheet

Current Current

Assets Liabilities

Debt and

Fixed Preferred

Assets

Shareholders’

Equity

CapitalStructure

Why is Capital Structure Important?

• 1) Leverage: higher financial leverage means higher returns to stockholders, but higher risk due to interest payments.

• 2) Cost of Capital: Each source of financing has a different cost. Capital structure affects the cost of capital.

• 3) The Optimal Capital Structure is the one that minimizes the firm’s cost of capital and maximizes firm value.

What is the Optimal Capital Structure?

• In a “perfect world” environment with no taxes, no transaction costs and perfectly efficient financial markets, capital structure does not matter.

• This is known as the Independence hypothesis: firm value is independent of capital structure.

Independence Hypothesis

• Firm value does not depend on capital structure.

Cost ofCapital

kc

0% debt financial leverage 100%debt

.

kc = cost of equitykd = cost of debtko = cost of capital


.


Cost ofCapital

kc

kd kd


Increasing leverage causes thecost of equity torise.


Cost ofCapital

kc

kd kd



Cost ofCapital

kc

kd

kc

kd




Cost ofCapital

kc

kd

kc

kd


What will be the net effect

on the overall cost of capital?


kc

kd


Cost ofCapital

kc

ko

kd


• If we have perfect capital markets, capital structure is irrelevant.

• In other words, changes in capital structure do not affect firm value.


Dependence Hypothesis

• Increasing leverage does not increase the cost of equity.

• Since debt is less expensive than equity, more debt financing would provide a lower cost of capital.

• A lower cost of capital would increase firm value.

Dependence Hypothesis

Cost ofCapital

kc

kd

financial leverage

kc

kd

Since the cost of debt is lowerthan the cost of equity...

Dependence HypothesisSince the cost of debt is lowerthan the cost of equity…increasing leverage reduces thecost of capital.

Cost ofCapital

kc

kd

financial leverage

kc

kdko

Moderate Position

• The previous hypothesis examines capital structure in a “perfect market.”

• The moderate position examines capital structure under more realistic conditions.

• For example, what happens if we include corporate taxes?

Remember this example?Tax effects of financing with debt

with stock with debt

EBIT 400,000 400,000

- interest expense 0 (50,000)

EBT 400,000 350,000

- taxes (34%) (136,000) (119,000)

EAT 264,000 231,000

- dividends (50,000) 0

Retained earnings 214,000 231,000

with stock with debt

EBIT 400,000 400,000

- interest expense 0 (50,000)

EBT 400,000 350,000

- taxes (34%) (136,000) (119,000)

EAT 264,000 231,000

- dividends (50,000) 0

Retained earnings 214,000 231,000

Remember this example?Tax effects of financing with debt

Moderate Position

Cost ofCapital

kc

kd

financial leverage

kc

kd

Moderate Position

Cost ofCapital

kc

kd

financial leverage

kc

kd

Even if the cost of equity risesas leverage increases, the cost of debt is very low...

Moderate Position

Cost ofCapital

kc

kd

financial leverage

kc

kd

becauseof the tax benefit

associated with debt financing.

Even if the cost of equity risesas leverage increases, the cost of debt is very low...

Moderate Position

Cost ofCapital

kc

kd

financial leverage

kc

kd

The low cost of debt reduces the cost of capital.

Moderate Position

Cost ofCapital

kc

kd

financial leverage

kc

kd

The low cost of debt reduces the cost of capital.

ko

Moderate Position

• So, what does the tax benefit of debt financing mean for the value of the firm?

• The more debt financing used, the greater the tax benefit, and the greater the value of the firm.

• So, this would mean that all firms should be financed with 100% debt, right?

• Why are firms not financed with 100% debt?

Why is 100% Debt not Optimal?

Bankruptcy costs: costs of financial distress.

• Financing becomes difficult to get.

• Customers leave due to uncertainty.

• Possible restructuring or liquidation costs if bankruptcy occurs.

Agency costs: costs associated with protecting bondholders.

• Bondholders (principals) lend money to the firm and expect it to be invested wisely.

• Stockholders own the firm and elect the board and hire managers (agents).

• Bond covenants require managers to be monitored. The monitoring expense is an agency cost, which increases as debt increases.

Why is 100% Debt not Optimal?

Moderate Positionwith Bankruptcy and Agency Costs

Cost ofCapital

financial leverage

kc

kd

Cost ofCapital

financial leverage

kc

kdkd


Cost ofCapital

financial leverage

kc

kd

kd


Cost ofCapital

financial leverage

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kd

kc

kd


Cost ofCapital

financial leverage

kc

kd

kc

kd

If a firm borrows too much, thecosts of debt and equity will spike upward, due to bankruptcy costsand agency costs.


Cost ofCapital

financial leverage

kc

kd

kc

kd


Cost ofCapital

financial leverage

kc

kd

kc

kdko


Cost ofCapital

financial leverage

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kd

kc

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ko


Cost ofCapital

financial leverage

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kd

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ko

Ideally, a firm should use leverageto obtain their optimum capital structure, which will minimize thefirm’s cost of capital.


Cost ofCapital

financial leverage

kc

kd

kc

kd

ko


Capital Structure Management

• EBIT-EPS Analysis - used to help determine whether it would be better to finance a project with debt or equity.



EPS = (EBIT - I)(1 - t) - P S



EPS = (EBIT - I)(1 - t) - P S

I = interest expense, P = preferred dividends,S = number of shares of common stock outstanding.

EBIT-EPS Example

Our firm has 800,000 shares of common stock outstanding, no debt, and a marginal tax rate of 40%. We need $6,000,000 to finance a proposed project. We are considering two options:

• Sell 200,000 shares of common stock at $30

per share,

• Borrow $6,000,000 by issuing 10% bonds.

If we expect EBIT to be $2,000,000:

Financing stock debt EBIT 2,000,000 2,000,000- interest 0 (600,000)EBT 2,000,000 1,400,000- taxes (40%) (800,000) (560,000)EAT 1,200,000 840,000# shares outst. 1,000,000 800,000EPS $1.20 $1.05

Financing stock debt EBIT 4,000,000 4,000,000- interest 0 (600,000)EBT 4,000,000 3,400,000- taxes (40%) (1,600,000)

(1,360,000)EAT 2,400,000 2,040,000# shares outst. 1,000,000 800,000EPS $2.40 $2.55

If we expect EBIT to be $4,000,000:

• If EBIT is $2,000,000, common stock financing is best.

• If EBIT is $4,000,000, debt financing is best.

• So, now we need to find a breakeven EBIT where neither is better than the other.

If we choose stock financing:EPS

EBIT$1m $2m $3m $4m

stock financing

0

3

2

1

If we choose bond financing:

EPS

EBIT$1m $2m $3m $4m

bond financing

0

3

2

1

Breakeven EBIT

EPS

EBIT$1m $2m $3m $4m

bond financing

stock financing

0

3

2

1

Breakeven Point

• Set 2 EPS calculations equal to each other and solve for EBIT:

Stock Financing Debt Financing

(EBIT-I)(1-t) - P = (EBIT-I)(1-t) - P

S S

Breakeven Point


(EBIT-I)(1-t) - P = (EBIT-I)(1-t) - P

S S

(EBIT-0) (1-.40) = (EBIT-600,000)(1-.40)

800,000+200,000 800,000

Breakeven Point


.6 EBIT = .6 EBIT - 360,000

1 .8

.48 EBIT = .6 EBIT - 360,000

.12 EBIT = 360,000

EBIT = $3,000,000

Breakeven EBIT

EPS

EBIT$1m $2m $3m $4m

bond financing

stock financing

0

3

2

1

For EBIT up to $3 million,stock financing is best.

Breakeven EBIT

EPS

EBIT$1m $2m $3m $4m

bond financing

stock financing

0

3

2

1

For EBIT up to $3 million,stock financing is best.

For EBIT greaterthan $3 million, debt financing is

best.

In-class Problem

• Plan A: sell 1,200,000 shares at $10 per share ($12 million total)

• Plan B: issue $3.5 million in 9% debt and sell 850,000 shares at $10 per share ($12 million total)

• Assume a marginal tax rate of 50%.

Breakeven EBIT

Stock Financing Levered Financing

(EBIT-I) (1-t) - P = (EBIT-I) (1-t) - P

S S

EBIT-0 (1-.50) = (EBIT-315,000)(1-.50)

1,200,000 850,000

EBIT = $1,080,000

Analytical Income Statement

Stock Levered

EBIT 1,080,000 1,080,000

I 0 (315,000)

EBT 1,080,000 765,000

Tax (540,000) (382,500)

NI 540,000 382,500

Shares 1,200,000 850,000

EPS .45 .45

levered financing

stock financing

EPS

EBIT$.5m $1m $1.5m $2m

0

.65

.45

.25

Breakeven EBIT

For EBIT up to $1.08 m,

stock financing is

best.

levered financing

stock financing

EPS

EBIT$.5m $1m $1.5m $2m

0

.65

.45

.25

Breakeven EBIT

Breakeven EBITFor EBIT up to $1.08 m,

stock financing is

best. For EBIT greaterthan $1.08 m,

the levered plan isbest.

levered financing

stock financing

EPS

EBIT$.5m $1m $1.5m $2m

0

.65

.45

.25

In-class Problem

• Plan A: sell 1,200,000 shares at $20 per share ($24 million total)

• Plan B: issue $9.6 million in 9% debt and sell shares at $20 per share ($24 million total)

• Assume a 35% marginal tax rate.

Breakeven EBIT

Stock Financing Levered Financing

(EBIT-I) (1-t) - P = (EBIT-I) (1-t) - P

S S

(EBIT-0) (1-.35) = (EBIT-864,000)(1-.35)

1,200,000 720,000

EBIT = $2,160,000

Analytical Income Statement

Stock Levered

EBIT 2,160,000 2,160,000

I 0 (864,000)

EBT 2,160,000 1,296,000

Tax (756,000) (453,600)

NI 1,404,000 842,400

Shares 1,200,000 720,000

EPS 1.17 1.17

Breakeven EBITlevered

financingstock

financingEPS

EBIT$1m $2m $3m $4m

0

1.5

1.17

.5


financingstock

financingEPS

EBIT$1m $2m $3m $4m

0

1.5

1.17

.5


stock financing is

best.


financingstock

financingEPS

EBIT$1m $2m $3m $4m

0

1.5

1.17

.5

For EBIT greaterthan $2.16 m,

the levered plan isbest.


stock financing is

best.

panduan pendanaan perusahaan how do we want to finance our firm’s assets? 2002, prentice hall,...

Documents

lower cost of capital

overall cost of capital

cost of equity kd

cost of debt ko

debt financial leverage

bt slide

different cost

optimal capital structure