Lecture_19

Lecture_19 - Lecture 19 Capital Structure Decision II BD...

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Lecture 19: Capital Structure Decision: II BD Chapter 15
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Topics Choosing Optimal Capital Structure Mini-Case
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Estimating Optimal Capital Structure For each capital structure: Estimate cost of debt Estimate cost of equity Calculate WACC Calculate firm value Deduct the value of the debt to find value of shareholder’s wealth
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Strasburg Electronics Currently is all-equity financed. Expected EBIT = $500,000. Firm expects zero growth. Tax rate 40% – Market risk premium: RP M = 6%. – 10,000 shares outstanding: r s = 12%; beta = 1.0; r RF = 6%; No short-term investment What if the firm changes its debt ratio to 40%?
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Estimating Cost of Debt Strasburg Electronics’ cost of debt with different capital structures: Cost of debt goes up as leverage and threat of bankruptcy increases
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Estimating Cost of Equity MM theory implies that beta changes with leverage. – b
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Lecture_19 - Lecture 19 Capital Structure Decision II BD...

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