BD_SM14 - Chapter 14 Capital Structure in a Perfect Market...

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Chapter 14 Capital Structure in a Perfect Market 14-1. a. EC1 () ± ² ³ ´ = 1 2 130,000 + 180,000 = 155,000, NPV = 155,000 1.20 µ 100,000 = 129,167 µ 100,000 = $29,167 b. Equity value = PV C 1 = 155,000 1.20 = 129,167 c. Debt payments = 100,000, equity receives 20,000 or 70,000. Initial value, by MM, is 129,167 ± 100,000 = $29,167 . 14-2. a. Total value of equity = 2 ± $2m = $4m b. MM says total value of firm is still $4 million. $1 million of debt implies total value of equity is $3 million. Therefore, 33% of equity must be sold to raise $1 million. c. In (a), 50% ± $4M = $2M. In (b), 2/3 ± $3M = $2M. Thus, in a perfect market the choice of capital structure does not affect the value to the entrepreneur. 14-3. a. E[Value in one year] = 0.8 50 + 0.2 20 = 44 . E = 44 1.10 = $40m . b. D = 20 1.05 = 19.048 . Therefore, E = 40 ± 19.048 = $20.952m . c. Without leverage, r= 44 40 ± 1 = 10% , with leverage, r= 44 ± 20 20.952 ± 1 = 14.55% . d. Without leverage, r= 20 40 ± 1 = ± 50% , with leverage, r= 0 20.952 ± 1 = ± 100% . 14-4. a. ABC XYZ FCF Debt Payments Equity Dividends Debt Payments Equity Dividends $800 0 800 500 300 $1,000 0 1000 500 500
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114 Berk/DeMarzo Corporate Finance b. Unlevered Equity = Debt + Levered Equity. Buy 10% of XYZ debt and 10% of XYZ Equity, get 50 + (30,50) = (80,100) c. Levered Equity = Unlevered Equity + Borrowing.
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This note was uploaded on 02/02/2012 for the course BUS 438 taught by Professor Dutt during the Winter '12 term at Cal Poly.

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BD_SM14 - Chapter 14 Capital Structure in a Perfect Market...

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