Chapter 14 Powerpoint

Chapter 14 Powerpoint - CHAPTER 14 Capital Structure and...

This preview shows pages 1–21. Sign up to view the full content.

Capital Structure and Leverage CHAPTER 14

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

View Full Document
C a p i t a l S t r u c t u r e F I N 3 4 0 3 - B u s i n e s s F i n a n c e A p p l i c a t i o n s B a s i c s C a p i t a l S t r u c t u r e T h e o r i e s B r e a k e v e n L e v e r a g e F u n c t i o n s B u s i n e s s a n d F i n a n c i a l R i s k B a s i c E q u a t i o n s M o d i g l i a n i & M i l l e r U s i n g V a l u a t i o n E q u a t i o n s O p t i m a l C a p i t a l S t r u c t u r e C u r r e n t V i e w S t o c k h o l d e r s v s . B o n d h o l d e r s
Breakeven Analysis Assumptions : Firms A and B each have sales of 100 units with a price of \$5 per unit. Firm B has traded fixed costs for variable costs. Firm B has levered itself by

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

View Full Document
Breakeven Analysis Firm A Firm B Sales \$500 \$500 Variable Costs -\$350 -\$200 Fixed Costs \$0 -\$150 EBIT \$150 \$150 Interest \$0 -\$60 EBT \$150 \$90 Taxes (40%) -\$60 -\$36 Net Income \$90 \$54 Units 100
Breakeven Analysis EBIT Breakeven : Q* = [F] / [P - V] S* = [F] / [1 - (V/P)] Net Income Breakeven : Q* = [F + I] / [P - V] S* = [F + I] / [1 - (V/P)]

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

View Full Document
Breakeven Analysis Firm B EBIT Breakeven : Q* = [\$150] / [\$5 - \$2] Q* = 50 Units S* = [\$150] / [1 - (\$2/\$5)] S* = [\$150] /[.60] = \$250 S* = [50 units] [\$5] = \$250
Breakeven Analysis Units 50 Firm A Firm B Sales \$250 \$250 Variable Costs -\$175 -\$100 Fixed Costs \$0 -\$150 EBIT \$75 \$0 Interest \$0 -\$60 EBT \$75 -\$60 Taxes (40%) -\$30 \$24 Net Income \$45 -\$36

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

View Full Document
Breakeven Analysis Firm B Net Income Breakeven : Q* = [\$150 + \$60] / [\$5 - \$2] Q* = 70 Units S* = [\$150 + \$60] / [1 - (\$2/\$5)] S* = [\$210] /[.60] = \$350 S* = [70 units] [\$5] = \$350
Breakeven Analysis Units 70 Firm A Firm B Sales \$350 \$350 Variable Costs -\$245 -\$140 Fixed Costs \$0 -\$150 EBIT \$105 \$60 Interest \$0 -\$60 EBT \$105 \$0 Taxes (40%) -\$42 \$0 Net Income \$63 \$0

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

View Full Document
Capital Structure and Risk Factors to consider Business risk Financial risk (leverage) Need for financial flexibility Tax position Managerial perspective Conservative Aggressive
Capital Structure and Risk r S = r RF + [r M - r RF ][ β L ] β L = β U + β U (1-T)(D/E) r S = r RF + [r M - r RF ][ β U ] + [r M - r RF ][ β U ](1-T)(D/E)

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

View Full Document
Capital Structure and Risk r S = r RF + Business risk premium + Financial risk premium Business risk concerns the uncertainty inherent in EBIT.
Business Risk 0 EBIT Probability Lower Risk Higher Risk

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

View Full Document
Business Risk Business risk factors Demand variability Sales price variability Input price variability Ability to adjust output prices for changes in input prices Operating leverage
Operating Leverage 0 100 200 300 400 500 600 700 800 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 Units Sold Revenues Costs \$225 Profit Fixed costs = \$0; Variable Costs = \$3.50/Unit : Breakeven = 0 Units

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

View Full Document
Operating Leverage 0 100 200 300 400 500 600 700 800 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 Units Sold Revenues Costs Fixed Costs Fixed costs = \$150; Variable Costs = \$2.00/Unit : Breakeven = 50 Units \$300 Profit
Operating Leverage Fixed costs = \$250; Variable Costs = \$1.00/Unit : 0 100 200 300 400 500 600 700 800 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 Units Sold Revenues Costs Fixed Costs Breakeven = 62.5 Units \$350 Profit

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

View Full Document
Operating Leverage EBIT L EBIT H Low Operating Leverage High Operating Leverage Can Use Operating Leverage to Increase Expected EBIT, But Risk Also Increases
Sales EBIT / BEP NI / ROE / EPS Fixed Costs Interest DTL DOL DFL Leverage Functions

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

View Full Document
Operating Leverage DOL = Degree of operating leverage [% Sales] [DOL] = % EBIT BEP = EBIT/TA Assuming no change in TA: [% Sales] [DOL] = % BEP
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/11/2011 for the course FIN 3403 taught by Professor Tapley during the Spring '06 term at University of Florida.

Page1 / 90

Chapter 14 Powerpoint - CHAPTER 14 Capital Structure and...

This preview shows document pages 1 - 21. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online