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Unformatted text preview: Component Capital InvestAfter-tax EarnValue PE P/BV Operating Ass 1000 125 1250 10.00 1.25 Cash 250 10 250 25.00 1.00 Firm 1250 135 1500 11.11 1.20 Gross Debt ApproachNet Debt Approach Debt = $500.00 $250.00 Equity = #DIV/0! #DIV/0! Cash = $250.00 Unlevered beta of operating assets = 1.42 1.42 Levered beta #DIV/0! #DIV/0! Cost of equity #DIV/0! #DIV/0! Cost of debt #DIV/0! 7.80% ! Cost of debt used has to be adjusted to reflect assumptions about cash holdings. Cost of capital #DIV/0! #DIV/0! Operating Assets #DIV/0! #DIV/0! Cash $250.00 $0.00 The gross and net debt approaches make different assumptions about how the cash in a firm is funded. Firm Value #DIV/0! #DIV/0! In the net debt approach, cash is entirely funded with riskfree debt and the operating assets are funded with all Debt $500.00 $250.00 of the equity and the remaining debt. In the gross debt approach, cash is funded with the same mix of debt andof the equity and the remaining debt....
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This note was uploaded on 01/29/2012 for the course FIN 6000 taught by Professor Banko during the Fall '11 term at University of Florida.
- Fall '11