M&M - Capital Structure Capital Structure (firms...

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Capital Structure
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Capital Structure (firm’s mix of financing) Cash flows (assets) Bondholders (D) Stockholders (E) V=PV(cash flows)=D+E D E
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Capital Structure E D E Unlevered V U Levered V L restructuring Do we increase firm value by borrowing?
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Modigliani and Miller Propositions (a Benchmark Case) In a perfect world: no tax no possibility of bankruptcy no transaction cost individual and corporation borrow at the same rate. Proposition I (no tax): V L =V U proposition II (no tax): ) ( * 0 0 D S r r E D r r - + =
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MM’s Story Trans Am Corporation currently has no debt in its capital structure. The firm is considering issuing debt to buy back some of its equity. Both its current and proposed capital structure are presented in the table. The firm’s assets are $8,000. There are 400 shares of the all equity firm, implying a market value per share of $20. The proposed debt issue is for $4,000. The interest rate is 10%.
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Before restructuring no debt 400 shares of stock ($20)
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M&M - Capital Structure Capital Structure (firms...

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