Principles of Finance with Excel (Основы финансов c Excel)

Подождите немного. Документ загружается.

PFE Chapter 21, Capital structure, empirical evidence page 8

5.b. Option effects of debt: The shareholders in a heavily indebted firm have less to lose

than those in a low-leverage firm. They may thus feel free to take more risks. Increased

leverage may thus affect the riskiness of the firm’s free cash flows (FCF). An example:

Bob and Jerry each own a similar building; the market value of each of their buildings is

$100,000. The buildings are in need of a very expensive repair. Bob owns his building

outright, whereas Jerry has a $99,000 mortgage on his building. Bob is much more likely

to do the repairs, since he has more to lose; Jerry might well reason that in the worst case

if something happens to his building, he’ll default on his mortgage and let the bank take

care of the problems.

6. Finally, it may that firms are limited in their borrowing by the kinds of assets they own. If

lenders require loan collateral, then firms with many fixed assets may be more easily able to

borrow than firms with more “ephemeral” assets. Thus, even if Modigliani-Miller are right, and

firms want to borrow as much as possible, it may be that software firms (with fewer tangible

assets) are less able to borrow than real estate firms.

21.2. How do firms capitalize?

One way to think about capital structure is to look the actual capital structures for

different companies and industries. As an example consider Abbott Laboratories, a major

American pharmaceutical firm: On 20 March 2002, Abbott’s balance sheets showed debt of

Lenders know all about option effects. It causes them to restrict their lending and also to impose covenants on the

borrowers.

PFE Chapter 21, Capital structure, empirical evidence page 9

approximately $8.7 billion and equity of $10.7 billion. Taking these book values debt and

equity, Abbott had a book value debt/equity ratio of 0.81:

8.7

,,- 0.81

10.7

Debt

Abbott Labs book value debt equity ratio

Equity

===

The book value of Abbott’s equity understates its market value. On 20 March 2002, Abbott had

1,563,436,372 shares outstanding; the market price per share was $51.80. Multiplying these two

numbers together gives the market value of Abbott’s equity as $81 billion, so that Abbott had a

market value debt/equity ratio of 0.108:

8.7

,,- 0.11

81.0

Debt

Abbott Labs market value debt equity ratio

Equity

===

The debt-equity ratio of pharmaceutical firms

In the spreadsheet below we calculate the debt/equity ratio in both book and market

values for major pharmaceutical companies.

PFE Chapter 21, Capital structure, empirical evidence page 10

ABCDEFGH

Debt/equity,

Book values

Debt/equity,

Market values

Abbot

0.81 0.11

AstraZeneca

0.09 0.01

Bristol-Myers Squibb

0.81 0.08

Eli Lilly

0.49 0.04

Endo Pharmaceuticals

0.31 0.09

GlaxoSmithKline

0.43 0.04

Johnson & Johnson

0.12 0.01

Merck

0.62 0.07

Novartis

0.21 0.05

Pfizer

0.45 0.03

Pharmacia

0.26 0.05

Schering-Plough

0.10 0.01

Wyeth

2.91 0.11

DEBT/EQUITY RATIOS FOR MAJOR DRUG COMPANIES

Source: Yahoo, 20mar02

DEBT/EQUITY RATIOS FOR PHARMACEUTICAL FIRMS

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

Abbot

AstraZeneca

Bristol-Myers

Squibb

Eli Lilly

Endo

Pharmaceuticals

GlaxoSmithKline

Johnson &

Johnson

Merck

Novartis

Pfizer

Pharmacia

Schering-Plough

Wyeth

Debt/equity,

Book values

Debt/equity,

Market values

Several things are clear from this data:

•

The average market debt/equity ratio for these firms is very small.

•

The variability in debt/equity ratios is very large. It does not appear that drug companies

appear to be striving for a common debt/equity ratio, whether measured by book or

market values.

Can we learn something from this data for pharmaceutical firms? To the author of this

book, it appears that there is no evidence that pharmaceuticals are striving for any target

debt/equity ratio. If, as we showed in Chapter 17 and section 21.1 above, firm targeting of

debt/equity ratios depends on the tax system, then the lack of a clear debt/equity pattern for

pharmaceuticals indicates that the tax effects of debt/equity ratios are relatively neutral. In a

PFE Chapter 21, Capital structure, empirical evidence page 11

word: The debt/equity ratios of the pharmaceutical sector are consistent with Merton Miller’s

hypothesis that

()()()

11*10

DCE

TTT−−− −=, so that there are no net tax benefits to either

maximizing or minimizing the corporate debt/equity ratio.

The debt-equity ratio of other industries

How does the pharmaceutical industry compare to retail grocery stores? As the graph

below shows, grocery chains appear to have much higher debt/equity ratios than pharmaceutical

firms. Having said this, the variation in debt/equity ratios for groceries is enormous. As for drug

companies, there appears no evidence of a general trend:

PFE Chapter 21, Capital structure, empirical evidence page 12

ABCDEFGHI

Debt/equity,

Book values

Debt/equity,

Market values

Ahold (AHO)

2.0100

0.4408

Albertson's Inc. (ABS)

0.9300

0.4189

AMCON Distributing Co. (DIT)

3.2700

3.6333

Arden Group, Inc. (ARDNA)

0.0900

0.0333

BAB, Inc. (BABB.OB)

0.4800

2.8235

Blue Square-Israel Ltd. (BSI)

0.4300

0.2118

Casey's General Stores (CASY)

0.5200

0.2921

China Resources Develop. (CHRB)

0.0000

Delhaize Group (DEG)

1.4000

1.1024

Distribucion y Servicio (DYS)

0.7400

0.2379

Fleming Companies, Inc. (FLM)

3.6300

1.8906

Foodarama Supermarkets (FSM)

2.3500

1.9421

Fresh America Corp. (FRES.OB)

0.2300

2.5556

Fresh Brands, Inc. (FRSH)

0.5300

0.2704

Great Atlantic & Pacific (GAP)

1.3200

0.8571

Gristede's Food's, Inc. (GRI)

3.3200

1.8971

Hurry, Inc. (HURY.OB)

0.0500

0.3571

Ingles Markets, Inc. (IMKTA)

2.6900

2.3596

Ito Yokado Co., Ltd. (IYCOY)

0.3400

0.1700

Kroger Company (KR)

2.5300

0.5020

Marsh Supermarkets, Inc. (MARSA)

1.8300

2.3165

Medifast, Inc. (MDFT.OB)

0.0400

0.0073

Nash Finch Company (NAFC)

1.8400

1.2432

Pantry, Inc. (PTRY)

4.8200

8.4561

Pathmark Stores (PTMK)

1.5600

0.8715

Penn Traffic Company (PNFT)

1.8100

1.9890

Publix Super Markets (PUSH.OB)

0.0000

Ruddick Corporation (RDK)

0.3500

0.2035

Safeway Inc. (SWY)

1.0200

0.2810

Santa Isabel (ISA)

0.4600

0.4340

Smart & Final Inc. (SMF)

0.5500

0.5392

Spartan Stores, Inc. (SPTN)

1.4600

2.2813

Super-Sol Ltd. (SAE)

0.2800

0.1346

Supermercados Unimarc S.A (UNR)

0.4700

2.4737

SUPERVALU, Inc. (SVU)

1.2900

0.7127

Synergy Brands, Inc. (SYBR)

0.2300

0.1885

Uni-Marts, Inc. (UNI)

2.8700

4.7833

Village Super Market, Inc (VLGEA)

0.5300

0.4530

Weis Markets, Inc. (WMK)

0.0500

0.0327

Whole Foods Market, Inc. (WFMI)

0.5700

0.1009

Wild Oats Markets, Inc. (OATS)

1.0900

0.5892

Winn-Dixie Stores, Inc. (WIN)

0.9100

0.3273

7-Eleven, Inc. (SE)

12.6100

1.5248

Debt/Equity ratios for Retail Grocery Companies

Source: Yahoo, 20mar02

Grocery Firms--Debt/Equity Ratios

Ahold (AHO)

Albertson's Inc. (ABS)

AMCON Distributing Co. (DIT)

Arden Group, Inc. (ARDNA)

BAB, Inc. (BABB.OB)

Blue Square-Israel Ltd. (BSI)

Casey's General Stores (CASY)

China Resources Develop. (CHRB)

Delhaize Group (DEG)

Distribucion y Servicio (DYS)

Fleming Companies, Inc. (FLM)

Foodarama Supermarkets (FSM)

Fresh America Corp. (FRES.OB)

Fresh Brands, Inc. (FRSH)

Great Atlantic & Pacific (GAP)

Gristede's Food's, Inc. (GRI)

Hurry, Inc. (HURY.OB)

Ingles Markets, Inc. (IMKTA)

Ito Yokado Co., Ltd. (IYCOY)

Kroger Company (KR)

Marsh Supermarkets, Inc. (MARSA)

Medifast, Inc. (MDFT.OB)

Nash Finch Company (NAFC)

Pantry, Inc. (PTRY)

Pathmark Stores (PTMK)

Penn Traffic Company (PNFT)

Publix Super Markets (PUSH.OB)

Ruddick Corporation (RDK)

Safeway Inc. (SWY)

Santa Isabel (ISA)

Smart & Final Inc. (SMF)

Spartan Stores, Inc. (SPTN)

Super-Sol Ltd. (SAE)

Supermercados Unimarc S.A (UNR)

SUPERVALU, Inc. (SVU)

Synergy Brands, Inc. (SYBR)

Uni-Marts, Inc. (UNI)

Village Super Market, Inc (VLGEA)

Weis Markets, Inc. (WMK)

Whole Foods Market, Inc. (WFMI)

Wild Oats Markets, Inc. (OATS)

Winn-Dixie Stores, Inc. (WIN)

7-Eleven, Inc. (SE)

Debt/equity,

Book values

Debt/equity,

Market values

Here’s similar data for auto manufacturers:

PFE Chapter 21, Capital structure, empirical evidence page 13

ABCDEFGHI

Debt/equity,

Book values

Debt/equity,

Market values

Collins Industries (COLL)

0.6200 0.5905

DaimlerChrysler(DCX)

2.3300 1.7007

Featherlite (FTHR)

2.5600 6.9189

Ford (F)

12.4500 5.1025

General Motors (GM)

8.4400 4.8786

Honda (HMC)

0.7600 0.6496

Ingersoll-Rand (IR)

1.0000 0.4348

Miller Industries (MLR)

0.9800 4.2609

Monaco Coach (MNC)

0.3100 0.0845

Navistar International (NAV)

2.4700 1.0292

Oshkosh Truck (OTRKB)

0.9400 0.3345

PACCAR (PCAR)

0.0600 0.0241

Rush Enterprises (RUSH)

2.5300 4.1475

Scania AB (SCVA)

0.6800 0.2698

Spartan Motors (SPAR)

0.3600 0.1463

Supreme Industries (STS)

0.3700 0.3058

Toyota Motor (TM)

0.7400 0.3700

Volvo (VOLVY)

0.9000 0.9091

Wabash National (WNC)

1.2200 1.3556

Average 2.0905 1.7638 <-- =AVERAGE(C3:C21)

Sigma 3.1195 2.1340 <-- =STDEV(C3:C21)

Debt/Equity ratios for Auto and Truck Manufacturers

Source: Yahoo, 20mar02

Auto-Truck Manufacturers--Debt/Equity

Collins Industries

(COLL)

DaimlerChrysler(DCX)

Featherlite (FTHR)

Ford (F)

General Motors (GM)

Honda (HMC)

Ingersoll-Rand (IR)

Miller Industries

(MLR)

Monaco Coach

(MNC)

Navistar International

(NAV)

Oshkosh Truck

(OTRKB)

PACCAR (PCAR)

Rush Enterprises

(RUSH)

Scania AB (SCVA)

Spartan Motors

(SPAR)

Supreme Industries

(STS)

Toyota Motor (TM)

Volvo (VOLVY)

Wabash National

(WNC)

Debt/equity,

Book values

Debt/equity,

Market values

In short: As viewed from the data, there does not appear to be a trend in debt/equity

ratios, whether measured in book or market values. This is evidence in favor of tax-neutrality

with respect to debt-equity policy and against theories (like the Modigliani-Miller theory of

capital structure with only corporate taxes) which claim that debt is the preferred method of

financing.

PFE Chapter 21, Capital structure, empirical evidence page 14

21.3. Measuring a firm’s asset

Assets

and WACC, an example

In this section we show how we measure the asset

Assets

for Ford Motor Company. We

use this

Assets

to compute the Ford’s WACC using the formula:

()

Assets M f

WACC r E r r

⎡⎤

=+ −

⎣⎦

Our primary interest in this section, is not the WACC, however. Rather:

•

We want to carefully show you how to use public sources of information (in this case

Yahoo) to compute a firm’s debt beta, debt/equity ratio, and asset beta.

•

We want to set the stage for the next section, in which we compute the

ssets

for all the

firms in the auto and truck industry in the U.S. This enables us to ask whether

ssets

affected by the debt/equity ratio, and to perform our own “homemade” test of the capital

structure propositions of the previous chapter. The answer appears to be negative—for

this industry we cannot find an effect of debt on

ssets

. Our conclusion is that the

debt/equity mix does not affect the weighted average cost of capital (WACC).

For the moment we concentrate on the first bullet and compute some numbers for Ford.

All the data is derived from Yahoo.

Ford’s cost of debt and debt beta

At the end of 2000, Ford reported income expense of $10.902 billion. Combined with the

debts on the balance sheets for 2000 and 1999, we can conclude that Ford’s interest rate was

6.62%:

PFE Chapter 21, Capital structure, empirical evidence page 15

ABC

2000 1999

Short-term debt 277,000,000 1,602,000,000

Long-term debt 169,503,000,000 158,150,000,000

Total debt 169,780,000,000 159,752,000,000

Interest expense 10,902,000,000

Implied interest rate 6.62% <-- =B7/AVERAGE(B5:C5)

FORD MOTOR COMPANY

Yahoo gives Ford’s equity

as 1.07. In order to compute Ford’s debt

, we use the

following computation:

(

)

fD Mf

cost of debt r r E r r

⎡

⎤

==+ −

⎣

⎦

This is the SML for debt. Since we know that r

= 6.62%, we can solve for

. To do this, we

assume that r

= 4.80% and that

()

Er r−=

()

6.62% 4.80%

0.3633

Er r

−

== =

−

ABC

Risk-free rate 4.80%

Market risk premium 5%

Debt beta 0.3633 <-- =(B8-B10)/B11

Ford’s debt/equity ratio

Yahoo gives Ford’s debt/equity ratio as 12.45. However, this ratio is in book values, and

we want the market value debt/equity ratio. Yahoo also gives Ford’s “price/book” ratio as

2.45—by this is meant the ratio of the market price of Ford’s shares to their book value. We can

now compute the market debt/equity ratio:

PFE Chapter 21, Capital structure, empirical evidence page 16

this is the "market/book"

ratio given in Yahoo

12.45* 5.08

2.45

book debt

market debt equity

market equity

book equity

↑

  

(Notice that we’ve assumed that the book value and market value of debt are equal.)

In our spreadsheet:

ABC

Debt/Equity, book values 12.45

Price/Book 2.45

Debt/Equity, market values 5.08 <-- =B14/B15

Computing the percentage of debt in the capital structure,

D+

is computed in market values. From the previous calculation, we know that the

debt/equity ratio in market values is 5.08. We use some algebra to compute

ED+

from the

/5.08

* 0.8356

1/ 15.08

DD DE

market value

ED ED DE

====

++ + +

We can now also compute

1 0.1644

ED ED

=− =

Computing Ford’s tax rate T

To compute Ford’s tax rate, we take its income tax expense and divide it into its pre-tax

income:

PFE Chapter 21, Capital structure, empirical evidence page 17

ABC

Income Before Tax 8,234,000,000

Income Tax Expense 2,705,000,000

Tax rate 32.85% <-- =B22/B21

Computing Ford’s asset beta,

Assets

The formula for the asset

is:

()

**1*

where

;

Assets E D C

ED ED

equity beta

debt beta

ercent of equity percent of debt

ED ED

ββ β

=+−

To do this computation, we use Yahoo’s estimate of Ford’s equity beta,

= 1.07, and

we use our calculation of Ford’s T

= 32.85%. Ford’s asset beta is

Assets

= 0.3798: