ch_16 (1).pptx - Financial Leverage and Capital Structure...

Info icon This preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 16 Financial Leverage and Capital Structure Policy
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
What is meant by capital restructuring What is the primary goal of financial managers? Can leverage help in achieving such goals? Capital Restructuring
Image of page 2
Capital Restructuring We are going to look at how changes in capital structure affect the value of the firm, all else equal Capital restructuring involves changing the amount of leverage a firm has without changing the firm’s assets The firm can increase leverage by issuing debt and repurchasing outstanding shares The firm can decrease leverage by issuing new shares and retiring outstanding debt
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
What is the primary goal of financial managers? Maximize stockholder wealth We want to choose the capital structure that will maximize stockholder wealth We can maximize stockholder wealth by maximizing the value of the firm or minimizing the WACC Choosing a Capital Structure
Image of page 4
The extent to which a firm relies on debt The more debt financing a firm uses in its capital structure, the more financial leverage it employs Financial Leverage
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Financial leverage, EPS, and ROE: an example Review the example in word file CH16
Image of page 6
Break-Even EBIT Find EBIT where EPS is the same under both the current and proposed capital structures If we expect EBIT to be greater than the break- even point, then leverage is beneficial to our stockholders If we expect EBIT to be less than the break-even point, then leverage is detrimental to our stockholders
Image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Ex 1 Page 569 ( SOLUTION IN WORD CH16 ( Maynard, Inc., has no debt outstanding and a total market value of 250,000$. EBIT are projected to be 28,000$ if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 30 percent higher. If there is a recession, then EBIT will be 50 percent lower. Maynard is considering a 90,000$ debt issue with a 7 percent interest rate. The proceeds will be used to repurchase a share of stock. There are currently 5,000 shares outstanding. Ignore taxes for this problem A. Calculate EPS under each of the three economic scenarios before any debt is issued. Also calculate the percentage changes in EPS when the economy expands or enters a recession. B. Repeat part (a) assuming that the economy goes with recapitalization. What do you observe?
Image of page 8
Ex 4 Page 542 James Corporation is comparing two different capital structures: an all equity plan (plan I) and a levered plan (plan II). Under plan I, the company would have 160,000 shares of stock outstanding. Under plan II, there would be 80,000 shares of stock outstanding and 2.8$ million in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes. A. If EBIT is 350,000$, which plan will result in the higher EPS? B. If EBIT is 500,000$, which plan will result in the higher EPS?
Image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern