Chap. 11 The cost of Capital MA0N0239 Yu Muramatsu.
-
Upload
theodore-barber -
Category
Documents
-
view
216 -
download
4
Transcript of Chap. 11 The cost of Capital MA0N0239 Yu Muramatsu.
Chap. 11
The cost of Capital
MA0N0239Yu Muramatsu
The rate of return that a firm must earn on the projects in which it invests to maintain the market value of its stock
The rate of return required by the market suppliers of capital to attract their funds to the firm
Cost of capital
1.Business Risk the firm’s acceptance of a given project
does not affect its ability to meet operating cost2.Financial Risk projects are financed in such a way that the
firm’s ability to meet required financing cost is unchanged
3.After-tax costs are considered relevant measured on an after-tax basis
Key assumptions
Because of terrorist attack in Sep. 2001 and economic difficulties, UAL lost $2.14 billion in 2001.
UAL Corporation filed for Chapter 11 bankruptcy protection in Dec. 2002.
United Airlines
RestructuringUAL received offers of
subscription for more than twice the capital necessary to support the $3 billion it sought.
UAL was able to reduce its financing costs by 75 basis points(0.75%)
United Airlines (Cont.)
UAL was able to restructure its $3 billion debt
Because of oversubscription of the refinancing, UAL made its financing costs lower
The new loan was set at 200 basis points (2.00%) over LIBOR , a reduction of 175 basis points (1.75%) from the original financing cost
The lower pricing is expected to result in net pre-tax savings of approximately $70 million per year
United Airlines (Cont.)
UAL was able to meet its capital needs primarily from operating activities and the issuance of debt
Companies will strive to meet some desired mix of debt and equity capital financing to raise its capital
Conclusion
Thank you