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Unformatted text preview: o When you increase debt who gets the extra value? Equity holders? Debt holders? o Value of debt (cash flow to creditors): Interest/ pretax kd o Cash flow to shareholders: RCF/ ke o Shareholders get all extra value from debt increase: LBO increases price per share When assets grow equity gets extra value Where is this extra value coming from? o Debt tax shield: Tax x debt As you take on more debt, int. exp. Grows, leading to tax reduction Value added through financing effort o So who loses value? The government loses tax revenue...
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