chapter17_a - Chapter 17 - Financing and Valuation 1....

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Chapter 17 - Financing and Valuation
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1. Optimal Financing Choices Lectures up to this point have focused on financial choices that maximize firm (or equity) value Managers tend to think about financial choices that lower their cost of capital Firm Value = PV(cash flows) discounted at the relevant cost of capital Maximizing value is equivalent to minimizing the cost of capital Issues in measuring value what goes in the numerator? (measuring cash flows) what goes in the denominator? (measuring the cost of capital)
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2. Financing choices and value Numerators Let UCF = unlevered cash flows = cash flows that would accrue to shareholders if firm only uses equity Let LCF = levered cash flows = cash flows that accrue to shareholders under current capital structure (with some debt) Denominators Let r 0 = cost of equity capital if a firm uses only equity financing Let r E = cost of equity capital under current capital structure (with some debt) Let r WACC = weighted average cost of capital
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(or firm) (1) Adjusted-present-value (APV) method - initial investment + benefits of debt (2) Flow-to-equity (FTE) method - (initial investment - amount borrowed) (3) WACC method initial investment
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This note was uploaded on 04/15/2008 for the course BUS 135 taught by Professor Na during the Winter '08 term at UC Riverside.

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chapter17_a - Chapter 17 - Financing and Valuation 1....

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