BD_SM_c14 - Chapter 14 Capital Structure in a Perfect...

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Chapter 14 Capital Structure in a Perfect Market 14-1. a. () 1 E C 1 130, 000 180, 000 155, 000, 2 155,000 NPV 100,000 129,167 100,000 $29,167 1.20 =+ = =−= −= ⎡⎤ ⎣⎦ b. 155,000 Equity value PV C 1 129,167 1.20 == = 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 $2m $4m = 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, E 40 19.048 $20.952m =− = . c. Without leverage, r= 44 11 0 % 40 , with leverage, r= 44 20 1 14.55% 20.952 . d. Without leverage, r= 20 15 0 % 40 −=− , with leverage, r= 0 0 0 % 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 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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This note was uploaded on 10/08/2010 for the course ENGIN 120 taught by Professor Ilan during the Spring '08 term at Berkeley.

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BD_SM_c14 - Chapter 14 Capital Structure in a Perfect...

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