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Risco, Retorno e Orçamento de
Capital
Prf. José Fajardo
EBAPE-FGV
Company Cost of Capital
Company Cost of Capital
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Company Cost of Capital
10%nologyknown tech t,improvemenCost
COC)(Company 15%business existing ofExpansion
20%products New
30% ventureseSpeculativ
RateDiscount Category
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Measuring Betas
• The SML shows the relationship between
return and risk
• CAPM uses Beta as a proxy for risk
• Other methods can be employed to
determine the slope of the SML and thus
Beta
• Regression analysis can be used to find Beta
Measuring Betas
Dell Computer
Slope determined from plotting the
line of best fit.
Price data – Aug 88- Jan 95
Market return (%)
Dell retu
rn (%
)R2 = .11
B = 1.62
Measuring Betas
Dell Computer
Slope determined from plotting the
line of best fit.
Price data – Feb 95 – Jul 01
Market return (%)
Dell retu
rn (%
)R2 = .27
B = 2.02
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Measuring Betas
General Motors
Slope determined from plotting the
line of best fit.
Price data – Aug 88- Jan 95
Market return (%)
GM
return
(%)R2 = .13
B = 0.80
Measuring Betas
General Motors
Slope determined from plotting the
line of best fit.
Price data – Feb 95 – Jul 01
Market return (%)
GM
return
(%)R2 = .25
B = 1.00
Measuring Betas
Exxon Mobil
Slope determined from plotting the
line of best fit.
Price data – Aug 88- Jan 95
Market return (%)
Exxon
Mob
il return
(%)
R2 = .28
B = 0.52
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Measuring Betas
Exxon Mobil
Slope determined from plotting the
line of best fit.
Price data – Feb 95 – Jul 01
Market return (%)
Exxon
Mob
il return
(%)
R2 = .16
B = 0.42
Beta Stability
% IN SAME % WITHIN ONE
RISK CLASS 5 CLASS 5
CLASS YEARS LATER YEARS LATER
10 (High betas) 35 69
9 18 54
8 16 45
7 13 41
6 14 39
5 14 42
4 13 40
3 16 45
2 21 61
1 (Low betas) 40 62
Source: Sharpe and Cooper (1972)
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Company Cost of Capitalsimple approach
• Company Cost of Capital (COC) is based
on the average beta of the assets
• The average Beta of the assets is based on
the % of funds in each asset
Company Cost of Capitalsimple approach
Company Cost of Capital (COC) is based on the average beta of the assets
The average Beta of the assets is based on the % of funds in each asset
Example
1/3 New Ventures B=2.0
1/3 Expand existing business B=1.3
1/3 Plant efficiency B=0.6
AVG B of assets = 1.3
Capital Structure - the mix of debt & equity within a company
Expand CAPM to include CS
R = rf + B ( rm - rf )becomes
Requity = rf + B ( rm - rf )
Capital Structure
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Capital Structure & COC
COC = rportfolio = rassets
rassets = rWACC = rdebt (D) + requity (E)
(V) (V)
Bassets = Bdebt (D) + Bequity (E)
(V) (V)
requity = rf + Bequity ( rm - rf )
IMPORTANT
E, D, and V are
all market values
Example
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0
20
0 0.2 0.8 1.2
Capital Structure & COC
Expected
return (%)
Bdebt Bassets Bequity
Rrdebt=7,5
Rassets=12.5
Requity=15
Expected Returns and Betas prior to refinancing
Union Pacific Corp.
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10
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Conclusions
• Do the best to make unbiased forecasts of a
project's cash flow
• Consider whether investors would regard
the project as more or less risky than typical
for a company of division