Ch 15 Capital Structure Part II

Ch 15 Capital Structure Part II - Chapter 15 Capital...

Info iconThis preview shows pages 1–18. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Chapter 15 Capital Structure Part II
Background image of page 1

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

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

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

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

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

View Full DocumentRight Arrow Icon
6
Background image of page 6
7 Firm Valuation Firm Valuation Measuring and Pricing Risk Ch 10,11 Asset Valuation Ch 4,7,8,18 Financing Policies: Cost of Capital Ch 12 Capital Structure Ch 15 Payout Policy Ch 16 Securities Valuation: Bonds Ch 6 Stocks Ch 9 External Factors
Background image of page 7

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

View Full DocumentRight Arrow Icon
8 Capital Structure Outline Capital Structure Theory In perfect Capital markets Miller-Modigliani Propositions With taxes Miller-Modigliani Propositions With taxes and financial Distress costs Trade-off theory Agency costs and Asymmetric information The Capital Structure Decision
Background image of page 8
9 Chapter Outline 1. Capital Structure - Introduction 2. Capital Structure in Perfect Capital Markets 3. Debt and Taxes 4. Costs of Bankruptcy and Financial Distress 5. Optimal Capital Structure: The Tradeoff Theory 6. Additional Consequences of Leverage: 6A. Agency Costs 6B. Asymmetric Information 7. Capital Structure: Putting It All Together
Background image of page 9

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

View Full DocumentRight Arrow Icon
10 Capital Structure’s Contribution to Firm Value and Risk Firm Value and Risk Asset Value and Risks Capital Structure (Financing): Market Imperfections affect Firm Value and Risks Corporate Tax Financial Distress Costs Agency Costs Asymmetric Information
Background image of page 10
11 Chapter Outline • 3. Debt and Taxes – 3A. Interest Tax Shield – 3B. Miller-Modigliani Proposition I with Tax – 3C. Maximizing Value same as Minimizing Cost of Capital – Appendix – Comprehensive Example: Miller-Modigliani Propositions I and 11
Background image of page 11

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

View Full DocumentRight Arrow Icon
12 3A. Debt and Taxes – Interest Tax Shield • A firm’s choice of investments (projects) determines its value and risk in perfect markets. • But realistically, markets are imperfect – The presence of taxes results in the choice of capital structure affecting the value and risk of a firm
Background image of page 12
13 Debt and Taxes – Interest Tax Shield • When a company takes on debt, the interest payments can be deducted from their taxable income • This deduction reduces the taxes paid by the firm – Net income to equity investors rises by the amount of taxes saved • The gain to investors from the amount of taxes saved in the presence of debt is referred to as the “interest tax shield”
Background image of page 13

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

View Full DocumentRight Arrow Icon
14 Example : Interest Tax Shield – Single Period • Consider two capital structure choices for a company: – (1)Equity + Debt – (2)100% Equity • Let EBIT = $1,000 • Interest expense with debt = $200 • Tax rate = 35%
Background image of page 14
15 Example : Interest Tax Shield – Single Period 650 520 Net Income (NI) (350) (280) Taxes(35%) 1,000 800 Income before tax 0 (200) Interest Expense $1,000 $1,000 EBIT NI without leverage NI with leverage
Background image of page 15

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

View Full DocumentRight Arrow Icon
16 Example : Interest Tax Shield – Single Period 650 720 Total inflow to all investors 650 520 NI to equity holders 0 200 Interest payment to debt holders Without leverage With leverage
Background image of page 16
17 Example : Interest Tax Shield – Single Period • Total inflow to all investors (debt holders and equity holders) in the presence of debt = $720
Background image of page 17

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

View Full DocumentRight Arrow Icon
Image of page 18
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 111

Ch 15 Capital Structure Part II - Chapter 15 Capital...

This preview shows document pages 1 - 18. Sign up to view the full document.

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