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Unformatted text preview: What is the exact relationship between the expected return on equity and firm leverage? R s = r o + (r o r B ) (B/S) How are market-value balance sheets set up? They are set up the same way as historical accounting balance sheets with assets on the left side and liabilities on the right side. However, instead of valuing assets in terms of historical values, market values are used. 16.5 What makes a levered firm more valuable than an otherwise-identical unlevered firm? Interest payments are tax deductible and dividend payments are not. Therefore, there is a tax benefit with interest which can be retained by the shareholders. What is MM Proposition I under corporate taxes? V L = V U + T C B What MM Proposition II under corporate taxes? r s = r o + (B/S)(1-T c )(r o r B )...
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- Fall '08