chapter14 - Chapter 14 Capital Structure in a Perfect...

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Chapter 14 Capital Structure in a Perfect Market 14-1. a. ( ) ( ) 1 1 130,000 180,000 155,000, 2 155,000 100,000 129,167 100,000 $29,167 1.20 E C NPV = + = È ˘ Î ˚ = - = - = b. ( ) ( ) 155,000 Equity value 1 129,167 1.20 PV C = = = c. Debt payments 100,000, = equity receives 20,000 or 70,000. Initial value, by MM, is 129,167 100,000 $29,167 - = . 14-2. a. Total value of equity 2 $2 $4 m m = ¥ = 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. 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. 14-3. a. E[Value in one year] ( ) ( ) 0.8 50 0.2 20 44 = + = . 44 E $40m 1.10 = = . b. D = 20 19.048 1.05 = . Therefore, 40 19.048 $20.952 E m = - = . c. Without leverage, r= 44 1 10% 40 - = , with leverage, r= 44 20 1 14.55% 20.952 - - = . d. Without leverage, r= 20 1 50% 40 - = - , with leverage, r= 0 1 100% 20.952 - = - . 14-4. 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: The Core b. Unlevered Equity = Debt + Levered Equity. Buy 10% of XYZ debt and 10% of XYZ Equity, get 50 + (30,50) = (80,100) c. Levered Equity = Unlevered Equity + Borrowing.
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