10. FIN 301 - F09 Capital Struture

# 10. FIN 301 - F09 Capital Struture - Capital Structure...

This preview shows pages 1–7. Sign up to view the full content.

Capital Structure Lab 10

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

View Full Document
2 Capital Structure and Firm Value Sources of funds: Debt after-tax cost of debt = R D  x (1-T) fraction of firm value financed by debt = w D Equity cost of equity = R E Fraction of firm value financed by equity = w E Is there an optimal mix of debt and equity (or an  optimal capital structure ) that minimizes the cost of  capital and maximizes the firm value?
3 Financial Leverage Financial leverage is the extent to which a  firm uses debt financing versus equity  financing A firm that is all equity financed is an  unlevered   firm A firm that is financed by a mix of debt and  equity is a  levered firm

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

View Full Document
4 Measuring Financial Leverage       Market Value of Debt Debt to Value Ratio Total Market Value D D D E V = = = + Market Value of Debt D Debt to Equity Ratio Market Value of Equity E = = D/V * Debt to Equity Ratio 1 - D/V 1 * Equity to Value Ratio 1 + D/E = =
5 Modigliani and Miller Theorem – Case 1 Case 1 no tax and thus no tax savings for debt no financial distress or agency costs associated with debt it does not matter how the firm is “sliced” between debt and  equity holders, since neither more debt nor less debt has a value- adding effect the value of the levered firm is equal to that of unlevered D + E L   =   V V L   =   =  V  V U   = E U the cost of levered equity is computed as: R EL  = R EU  +  D / (R EU  – R D

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

View Full Document
6 Example 1: The Wonderland White Rabbit Inc (WRI) is an all-equity financed firm worth \$5 million  that’s operating in Wonderland where corporate tax rate is zero and
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 11/01/2011 for the course BUSINESS FIN301 taught by Professor Andrew during the Fall '10 term at University of Alberta.

### Page1 / 16

10. FIN 301 - F09 Capital Struture - Capital Structure...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online