FINA4210 HW1 - criteria 7 Under what circumstances would changing a company’s capital structure affect its value A company’s capital structure

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Austin Wen FINA 4210 HW1 Due January 26 th , 2011 2. If value is based on discounted cash flows, why should a company or investor analyze growth and ROIC? Because the cash flows can come from many different sources such as revenue growth, a reduction of labor cost, or a repurchase agreement, etc. If we just simply evaluate the value from all sources of discounted cash flows, the result would be misleading. Therefore, we focus on the cash flows that specifically relate to revenue growth and ROIC to give us a better picture of a company’s value. And, we can also compare the results among different companies since every company is evaluated under the same
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Unformatted text preview: criteria. 7. Under what circumstances would changing a company’s capital structure affect its value? A company’s capital structure can be represented by its weighted average cost of capital (WACC). There is an equilibrium proportion of equity and debt to have a minimum WACC. A company would not be able to create value by moving away from the equilibrium point unless there is a change on the tax law because the interest payment of debt is considered tax deductible. If the tax law has changed, then moving the capital structure toward the equilibrium would create value....
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This note was uploaded on 06/06/2011 for the course FINA 4210 taught by Professor Staff during the Spring '08 term at University of Georgia Athens.

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