I.%20Debt%20and%20value

I.%20Debt%20and%20value - I Debt and val ue We examine two...

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1 I. Debt and value We examine two important stories for the benefit and cost tradeoffs from using debt. Later we will examine more stories A. Tax shields and bankruptcy cost B. Agency costs of debt and equity C.Sum up
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2 Income Statement Sales t COGS and SG&A t EBDITA t Earnings before depreciation, interest and taxes D DEP t Depreciation EBIT t Earnings before interest and taxes Interest Expense t The borrowing rate times the par value; r B B EBT t Earnings before taxes Taxes t T x [ EBIT r B B ], where T is the tax rate NI t Net Income ( Profit ); (1 T )x[ EBIT r B B ]
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3 A. Debt tax shields and bankruptcy cost Look at the tax shield from the debt, Company U Company L TxEBIT Tx[EBIT - r B B] TxEBIT TxEBIT - Txr B B Co. L pays Tr B B less in taxes. This is worth L u B B Tr B TxB. So V V TB r = = +
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