chap015 - Chapter 15 CAPITAL STRUCTURE BASIC CONCEPTS...

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Chapter 15 CAPITAL STRUCTURE BASIC CONCEPTS SLIDES CHAPTER WEB SITES Section Web Address End-of-chapter material www.mhhe.com/edumarketinsight CHAPTER ORGANIZATION 15.1 The Capital Structure Question and the Pie Theory 15.2 Maximizing Firm Value versus Maximizing Stockholder Interests 15.1 Key Concepts and Skills 15.2 Chapter Outline 15.3 Capital Structure and the Pie 15.4 Stockholder Interests 15.5 Financial Leverage, EPS, and ROE 15.6 EPS and ROE Under Current Structure 15.7 EPS and ROE Under Proposed Structure 15.8 Financial Leverage and EPS 15.9 15.10 Homemade Leverage: An Example 15.11 Homemade (Un)Leverage: An Example 15.12 MM Proposition I (No Taxes) 15.13 MM Proposition II (No Taxes) 15.14 MM Proposition II (No Taxes) 15.15 MM Proposition II (No Taxes) 15.16 15.17 MM Proposition I (With Taxes) 15.18 MM Proposition II (With Taxes) 15.19 The Effect of Financial Leverage 15.20 Total Cash Flow to Investors 15.21 Total Cash Flow to Investors 15.22 Summary: No Taxes 15.23 Summary: Taxes 15.24 Quick Quiz
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A-186 CHAPTER 15 15.3 Financial Leverage and Firm Value: An Example Leverage and Returns to Shareholders The Choice between Debt and Equity A Key Assumption 15.4 Modigliani and Miller: Proposition II (No Taxes) Risk to Equityholders Rises with Leverage Proposition II: Required Return to Equityholders Rises With Leverage MM: An Interpretation 15.5 Taxes The Basic Insight Present Value of the Tax Shield Value of the Levered Firm Expected Return and Leverage under Corporate Taxes The Weighted Average Cost of Capital R WACC and Corporate Taxes Stock Price and Leverage under Corporate Taxes ANNOTATED CHAPTER OUTLINE Slide 15.0 Chapter 15 Title Slide Slide 15.1 Key Concepts and Skills Slide 15.2 Chapter Outline 15.1. The Capital Structure Question and the Pie Theory The value of the firm equals the market value of the debt plus the market value of the equity (firm value identity). This is just: V = D + E. Slide 15.3 Capital Structure and the Pie 15.2. Maximizing Firm Value versus Maximizing Stockholder Interests When the market value of debt is given and constant, any change in the value of the firm results in an identical change in the value of the equity. The key to this reasoning lies in the fixed nature of debt and the residual nature of stock. Slide 15.4 Stockholder Interests 15.3. Financial Leverage and Firm Value: An Example
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CHAPTER 15 A-187 .A Leverage and Returns to Shareholders Example (additional example from the ones in the book and slides) Current Proposed Assets $5,000,00 0 $5,000,00 0 Debt 0 2,500,000 Equity 5,000,000 2,500,000 D/E ratio 0 1 Share price (assume it does not change when shares are repurchased) $10 $10 Shares outstanding 500,000 250,000 Interest Rate N/A 10% Current capital structure: No debt Recession Expected Expansion EBIT $300,000 $650,000 $1,000,000 Interest Expense 0 0 0 Net Income $300,000 $650,000 $1,000,000 ROE 6% 13% 20% EPS $0.60 $1.30 $2.00 Proposed capital structure: D/E = 1; interest rate = 10%
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chap015 - Chapter 15 CAPITAL STRUCTURE BASIC CONCEPTS...

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