BD_SM14 - Chapter 14 Capital Structure in a Perfect Market...

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Chapter 14 Capital Structure in a Perfect Market 14-1. a. a. E C 1 ( 29 = 1 2 130,000 + 180,000 ( 29 = 155,000, ΝΠς = 155,000 1.20 - 100,000 = 129,167 - 100,000 = 529,167 b. b. Equity value = Πς Χ 1 ( 29 ( 29 = 155,000 1.20 = 129,167 c. c. Debt payments = 100,000, equity receives 20,000 or 70,000. d. Initial value, by MM, is 129,167 - 100,000 = 529,167 . e. 14-2. f. a. Total value of equity = 2 × 52μ = 54μ g. b. MM says total value of firm is still $4 million. $1 million of debt implies total value of equity is $3 million. Therefore, 33% of equity must be sold to raise $1 million. h. c. In (a), 50% × $4M = $2M. In (b), 2/3 × $3M = $2M. Thus, in a perfect market the choice of capital structure does not affect the value to the entrepreneur. i. 14-3. j. a. E[Value in one year] = 0.8 50 ( 29 + 0.2 20 ( 29 = 44 . E = 44 1.10 = 540μ . k. b. D = 20 1.05 = 19.048 . Therefore, E = 40 -19.048 = 520.952μ . l. c. Without leverage, r= 44 40 -1 = 10% , with leverage, r= 44 - 20 20.952 -1 = 14.55% . m. d. Without leverage, r= 20 40 -1 = -50% , with leverage, r= 0 20.952 -1 = -100% . 14-4. n. a. ABC XYZ FCF Debt Payments Equity Dividends Debt Payments Equity Dividends $800 0 800 500 300 $1,000 0 1000 500 500
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114 Berk/DeMarzo • Corporate Finance o. b. Unlevered Equity = Debt + Levered Equity. Buy 10% of XYZ debt and 10% of XYZ Equity, get 50
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BD_SM14 - Chapter 14 Capital Structure in a Perfect Market...

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