FIN+4414+-+Capital+Structure+Decisions+-+The+Basics+-+Chapter+16

FIN+4414+-+Capital+Structure+Decisions+-+The+Basics+-+Chapter+16

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
Capital Structure Decisions: The Basics
Background image of page 1

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

View Full DocumentRight Arrow Icon
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
Background image of page 2
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
Background image of page 3

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

View Full DocumentRight Arrow Icon
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)]
Background image of page 4
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
Background image of page 5

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

View Full DocumentRight Arrow Icon
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
Background image of page 6
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
Background image of page 7

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

View Full DocumentRight Arrow Icon
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
Background image of page 8
Capital Structure and Risk Factors to consider Business risk Financial risk (leverage) Need for financial flexibility Tax position Managerial perspective Conservative Aggressive
Background image of page 9

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

View Full DocumentRight Arrow Icon
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)
Background image of page 10
Capital Structure and Risk r S = r RF + Business risk premium + Financial risk premium Business risk concerns the uncertainty inherent in EBIT.
Background image of page 11

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

View Full DocumentRight Arrow Icon
Business Risk 0 EBIT Probability Lower Risk Higher Risk
Background image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 42

FIN+4414+-+Capital+Structure+Decisions+-+The+Basics+-+Chapter+16

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online