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MindMap Gallery Financial Cost Management 2022

Financial Cost Management 2022

Financial Cost Management 2022D4 Capital Cost Knowledge Compilation, including: estimation of common stock capital cost, estimation of hybrid financing capital cost, calculation of weighted average cost of capital, estimation of debt capital, and the concept and use of capital cost.

Edited at 2022-05-18 17:16:06

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Financial Cost Management 2022

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Outline

Cost Flows
- 58
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cost control ideas
- 65
- 1
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Financial management mind map
- 50
- 1
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PMP-7 Cost Management
- 77
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Cost management mind map
- 85
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Logistics cost management mind map
- 48
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Project management cost management mind map
- 22
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cost management
- 35
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cost management
- 30
- 1
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Chapter 8 Cost Management
- 31
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D4 capital cost

Estimate of cost of common equity capital

Estimated cost of common equity capital excluding issuance expenses

capital asset pricing model

rs=rrf β*(rm-rrf)

rf usually chooses the interest rate of long-term government bonds; the yield to maturity of publicly traded government bonds is used as a proxy for the risk-free interest rate; nominal currencies including inflation are usually selected to prepare projected financial statements and determine cash flows, while using inflation-free nominal currencies. Risk interest rate calculation cost of capital

When there is no significant change in the risk characteristics of the β company, select a long time period; for major changes, use the year after the change. The longer the period, the more reliable it is. The time interval at which earnings are measured, weekly or monthly returns are widely used

Market risk premium: Choose a longer time period, economic boom & recession; arithmetic mean & geometric mean (most people)

dividend growth model

rs=D1/P0 g

g-Historical growth method/sustainable growth rate method/security analyst forecast method

Bond Yield Risk Adjustment Model

rs=rdtRPc

after-tax cost of debt

The risk premium required by shareholders to bear greater risk than creditors - the equity relative to bond risk premium

Empirical estimation method/historical data analysis method

Estimate of cost of common equity capital taking into account issuance expenses

Cost of capital for newly issued common stock

rs=D1/P0(1-F) g

f is the issuance expense rate

Estimate of retained earnings capital cost

The cost of retained earnings capital is estimated to be similar to the cost of common equity capital, but does not take into account issuance expenses.

Estimates of Hybrid Financing Capital Costs

Features and content

Combines the dual attributes of debt and equity financing

Preferred shares, perpetual bonds, convertible bonds, bonds with warrants

Estimates of Hybrid Financing Capital Costs

preferred stock

perpetual bond

Calculation of weighted average cost of capital

definition

It is the average cost of all long-term capital obtained by taking the weighted average of the individual long-term capital cost rates based on the proportion of each individual long-term capital in the total capital of the enterprise.

Calculation method

Weighted average capital cost = cost of the jth individual capital * weight of the jth individual capital in all capital (n - number of different types of financing) - multiply and add

Debt capital estimates

The concept of cost of debt capital

Determine the rate of return required by creditors

Distinguish between: historical cost & future cost of debt; promised returns and expected returns; long-term debt costs and short-term debt costs

Estimate of pre-tax debt cost of capital

Estimate of pre-tax cost of debt capital excluding issuance charges

Choice of Debt Capital Cost Estimation Method

yield to maturity method

Comparable Companies Act

risk adjustment approach

financial ratio method

Estimate of pre-tax cost of debt capital taking into account issuance charges

Bond issue price* (1-issuance rate)

Estimate of after-tax cost of debt capital

=Pre-tax debt capital cost*(1-t)

The concept and use of capital cost

concept

Opportunity cost of investment capital - Opportunity cost - Required rate of return - Choice rate of investment project - Minimum acceptable rate of return

What is related to the company's financing activities is the company's capital cost; what is related to the investment activities is the capital cost of the investment project.

Cost of capital - the price a company pays to obtain and use capital. The return investors receive from securities is the cost of financing. (Investor’s perspective)

Project Capital Cost - The rate of return required by a company to invest in a capital expenditure project.

use

Investment decisions, financing decisions, working capital management, corporate value assessment, performance evaluation

Influencing factors

external

risk-free rate

market risk interest rate

tax rate

Internal factors

Capital Structure

Investment decision

D5 Investment Project Capital Budget

Types of investment projects and evaluation procedures

investment type

Mainly new construction or expansion projects & renovation projects

Evaluation procedure

Propose investment plan

Estimated related cash flows

Calculate investment decision indicators

Compare decision indicators to acceptance criteria

Perform sensitivity analysis

Evaluation methods for investment projects

Evaluation methods for independent projects

Basic (the basic indicator is future net cash flow & present value of original investment)

Net present value method, present value index method

Net present value method: npv = present value of future net cash flows - present value of original investment

If it is greater than 0, it means that the return on investment is greater than the capital cost. Adopt~

Present value index method: pi=1 npv=present value of future net cash flow/present value of original investment

Relative number, reflecting efficiency, is greater than 1, and the return on investment is greater than the capital cost, adopted~

Internal rate of return: irr = the discount rate that makes the present value of future cash flows = the present value of the original investment or the discount rate at which the net present value of the investment project is zero

Generally, it is a step-by-step test. First, find the two discount rates with the net present value closest to 0, and find it by interpolation. In special cases, look up the table. IRR>Capital cost to be adopted

Auxiliary

Payback period method - dynamic & static payback period

quiet

The time required for the future net cash flow caused by investment to accumulate to be equal to the original investment amount - the number of years required to recover the investment

The construction period is 0, and the static payback period = original investment/future annual net cash flow

If the original investment is divided into several years, the static payback period = M The uncollected amount in year M / The net cash flow in year M 1

move

Consider the time value of money

The original investment is a one-time investment, and the construction period is 0. (P/A, i, n) = present value of original investment/future annual net cash flow (then use interpolation method)

If not, then the dynamic payback period = M The present value of the uncollected amount in year M / The present value of the net cash flow in year M 1

accounting rate of return ARR

Calculated based on the ratio of the estimated average annual net profit over the life of the project to the estimated capital occupation

Simple

Average annual net profit/original investment*100%

average capital occupation

Average annual net profit/average capital occupation*100%=average annual net profit/(original investment amount net residual value of investment)/2*100%

Prioritization issues for mutually exclusive projects

Projects have the same lifespan - the conclusion of the net present value method takes precedence

Project life spans vary

Technological progress cannot be replicated; replacement costs rise when inflation is severe; competition reduces project returns or even eliminates them

common years method

Assuming that the project can be reset, choose the least common multiple as the common life span

equal annuity method

Calculate the net present value, and then calculate the equal annual amount = net present value of the plan/(P/A, i, n); for perpetual annuity, perpetual net present value = equal annuity/capital cost i

Total distribution when the total amount is limited

There is no limit on the total amount of capital. As long as npv>0 or IRR>capital cost, you can invest.

But if it is limited, it is necessary to find the combination with the largest total net present value as the optimal combination.

Estimation of investment project cash flows

Factors affecting cash flow of investment projects

cash flow - cash inflow & cash outflow & the difference is net cash flow

Distinguish between relevant and non-relevant costs

Must be considered when making specific decisions and analyses: variable cost, marginal cost, opportunity, replacement, cash, avoidable, deferrable, exclusive, differential, etc.

Not relevant

Sunk/inevitable, undelayable/common cost, etc.

Don’t ignore opportunity costs

When adopting new solutions, consider the impact on other projects

need for working capital

Working capital is a stock indicator, and cash flow is a flow indicator. The impact of working capital on cash flow is the increase in working capital. Only when the scale of working capital increases, does it need to increase working capital investment.

Determination of cash flow for new projects

Project life cycle

No income tax considered

Consider income taxes

After-tax cost = cost amount * (1-t)

After-tax income = income finance * (1-t)

Depreciation tax deduction = depreciation *t

after tax cash flow

Cash flow from fixed asset renewal projects

Features - Cash Outflow

average annual cost

Estimation of investment project discount rate

Use the enterprise's current weighted average cost of capital as the capital cost of the investment project

Use the comparable companies method to estimate the capital cost of investment projects

Sensitivity analysis of investment projects

meaning

method

sensitivity method

maxmin method