The reason for this result is because any surplus

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Unformatted text preview: on? Doing valuation in the presence of bond holders is similar to the case we considered. With bond holders, the WACC will be a weighted average cost of both equity and debt. As we will see in future classes, the WACC is likely to be affected by the tax rate. In that case as well, to maximize shareholder value, firms should invest as long as RONA is greater than WACC. The reason for this result is because any surplus value created by the firm goes only to shareholders because bond holders do not get anything more than the principle and interest that was promised upfront. 9. (slide p15) What’s “MVA” stand for? Market Value of Assets. 10. (slide p17) Please explain how we can get “RONA” and “WACC”. (calculation) What’s the effect of tax on these? As mentioned earlier, taxes are likely to impact a firm’s WACC. So even in the presence of taxes, we should compare RONA and WACC. The way we measure RONA will be different. We should compare after tax return to WACC. 11. (slide p19) Why “Equity Value=Present Value of Future Dividends”? When you buy a firm’s stock, what you get is the future stream of divid...
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This document was uploaded on 01/30/2014.

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