13 - Capital Budgeting Financing Cash Flow Rules Chapter 9...

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Capital Budgeting Cash Flow Rules Chapter 9 Project Evaluation Chapter 11 Cash Flow Identification Chapter 2, 10 Timing Time Value of Money Chapter 5, 6 Risk and Return Chapter 12, 13, 14 Stocks and Bond Chapter 7, 8, 15 Financing Capital Structure Chapter 16
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FINA1003 Corporate Finance Faculty of Business and Economics University of Hong Kong Dr. Tao Lin Chapter 16: Financial Leverage and Capital Structure 2
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Capital Restructuring Activities that alter the firm’s existing financial leverage are called capital restructurings. Increase leverage by issuing debt and repurchasing outstanding shares Decrease leverage by issuing new shares and retiring outstanding debt Capital restructuring does not involve changes in firm’s assets. Capital structure decisions can be studies separately from investment decisions.
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Choosing a Capital Structure What is the primary goal of financial managers? Maximize stockholder wealth We want to choose the capital structure that will maximize stockholder wealth Normally, changes in firm value is the same as the net effect on stockholders. We can maximize stockholder wealth by maximizing firm value or minimizing WACC
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Financial Leverage Capital Structure Bankruptcy Costs Taxes Reduce WACC
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Capital Structure Theory Modigliani and Miller Theory of Capital Structure Proposition I firm value Proposition II WACC The value of the firm is determined by the cash flows to the firm and the risk of the assets Changing firm value Change the risk of the cash flows Change the cash flows
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Capital Structure Theory Implications Case I No taxes and no bankruptcy costs Homemade leverage and un-levering Leverage is irrelevant. Case II Positive corporate tax rate and no bankruptcy costs Interest Tax shield creates extra cash flow and increases firm value Leverage increases value. Case III Corporate taxes and bankruptcy costs Leverage has both benefits and costs.
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Unlevered Levered Assets $8,000,000 Debt $0 $4,000,000 Equity $8,000,000 Debt/Equity Ratio 0 Share Price $20 Shares Outstanding 400,000 200,000
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This note was uploaded on 05/11/2011 for the course BUSFIN 1003 taught by Professor Cyc during the Spring '11 term at HKU.

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13 - Capital Budgeting Financing Cash Flow Rules Chapter 9...

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