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CCI_supplement - A simplified CCI Lets ignore(for now Tax...

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1 A simplified CCI Let’s ignore (for now) Tax deductibility of interest Transaction cost of the equity issue How many shares issued now? n = $50MM/17.75 = 2.82 MM Assuming capital markets are “efficient”, what does CCI’s market-value balance sheet look like before the acquisition? Assets Financing 79.9 MM D = 0 E = 17.75*4.5MM = 79.9 MM
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2 Leverage and Value What does CCI’s market-value balance sheet look like after the acquisition If financed with debt? If financed with equity? Are the equity holders better off? P(debt) = 79.9/(4.5) = 17.75 P(equity) = 129.9/(4.5+2.82) = 17.75 Assets Financing 79.9 + 50 = 129.9 MM D = 50 E = 129.9 - 50 = 79.9 MM Assets Financing 79.9 + 50 = 129.9 MM D = 0 E = 129.9 - 0 = 129.9 MM
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3 Leverage and EPS EBIT chart from case Revised EBIT chart (ignoring taxes and transaction costs) 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 0 2.5 5 7.5 10 12.5 15 17.5 20 22.5 25 27.5 30 32.5 35 37.5 40 EBIT EPS Debt Equity -2 -1 0 1 2 3 4 5 0 2.5 5 7.5 10 12.5 15 17.5 20 22.5 25 27.5 30 32.5 35 37.5 40 EBIT EPS Debt Equity
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4 Leverage and risk Compare the returns on the following two portfolios: 1.
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