QDai for FEUNL Finanças November 16. QDai for FEUNL Topics covered  Long-term financing Debt  Unfunded debt  Funded debt  Debenture  Bond  Consol.

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QDai for FEUNL Finanças November 16

QDai for FEUNL Topics covered  Long-term financing Debt  Unfunded debt  Funded debt  Debenture  Bond  Consol Stock  Common stock  Preferred stock

QDai for FEUNL Difference between debt and equity debtequity

QDai for FEUNL Long-term financing: Common stock  Directly contributed capital Par value Shares authorized vs. Shares issued Dedicated capital Capital surplus  Indirectly contributed capital Retained earnings  Book value  Market value

QDai for FEUNL Capital structure  What is the goal of the firm: maximizing V or maximizing S?  Firm value V=B+S SBSB

QDai for FEUNL Capital structure: max V vs. max S No debt (unlevered) With debt (levered) Debt Equity Firm value

QDai for FEUNL Financial leverage: an example Current Assets$20,000 Debt$0 Equity$20,000 Debt/Equity ratio0.00 Interest raten/a Shares outstanding400 Share price$50 Proposed $20,000 $8,000 $12,000 2/3 8% 240 $50 Consider an all-equity firm that is considering going into debt. (Maybe some of the original shareholders want to cash out.)

QDai for FEUNL EPS and ROE Under Current Capital Structure RecessionExpectedExpansion EBIT$1,000$2,000$3,000 Interest Net income EPS ROA ROE Current Shares Outstanding = 400 shares

QDai for FEUNL EPS and ROE Under Proposed Capital Structure RecessionExpectedExpansion EBIT$1,000$2,000$3,000 Interest Net income EPS ROA ROE Proposed Shares Outstanding = 240 shares

QDai for FEUNL Financial Leverage and EPS (2.00) ,0002,0003,000 EPS EBIT in dollars, no taxes

QDai for FEUNL Modigliani and Miller (MM) Proposition (no taxes)  Proposition I

QDai for FEUNL Assumptions of the Modigliani-Miller Model  Homogeneous Expectations  Homogeneous Business Risk Classes  Perpetual Cash Flows  Perfect Capital Markets

QDai for FEUNL Homemade Leverage: An Example RecessionExpectedExpansion EPS of Levered Firm$1.50$5.67$9.83 Earnings for 24 shares$36$136$236

QDai for FEUNL Homemade Leverage: An Example RecessionExpectedExpansion EPS of Unlevered Firm$2.50$5.00$7.50 Earnings for 40 shares$100$200$300

QDai for FEUNL The MM Propositions II (No Taxes)  Proposition II

QDai for FEUNL The MM Proposition II (No Taxes) The derivation