lecture_11s - Introduction to Managerial Finance Lecture...

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Introduction to Managerial Finance Lecture Notes 11 Prof. H. Wang © copyright 1
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ACC and Beta WACC and Beta ± We have already seen how equity beta’s will change with leverage ± Consider an all-equity firm with an asset beta of 0.52 ll Equity => All Equity > • Cost of Capital = 2
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± Suppose the firm instead issues riskless debt at the 5% rate, with a D/E ratio of 0.5 • Equity MCR ACC WACC 3
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everage and Taxes Leverage and Taxes ± So far, we have considered the effects of leverage in a “PERFECT” world • In such a world, leverage does not effect value, only risk and return • In this case, financing choices and capital structure are irrelevant e eva t • But in the real world, firms must pay taxes • Can leverage be used to reduce taxes, and increase value? 4
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± Interest payments on debt can be deducted from corporate earnings before paying corporate income tax: • Thus, paying interest (as opposed to dividends) is a way to give money back to investors without paying corporate income tax •T h ere is a “Tax Shield” associated with debt that is e e s a a S e d assoc ated w t debt t at s valuable! 5
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± Another View • Before: • With Taxes: o maximize value of the firm ± To maximize value of the firm 6
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he Interest Tax Shield The Interest Tax Shield ± Debt reduces the government’s share of the corporate pie uppose the corporate tax rate is 40% Suppose the corporate tax rate is 40% quity 300 200 Equity Debt Government 0 240 160 Equity Debt Government 7 100
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This note was uploaded on 12/01/2010 for the course FINANCE 27735 taught by Professor Hefeiwang during the Spring '10 term at UChicago.

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lecture_11s - Introduction to Managerial Finance Lecture...

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