1. QDai for FEUNL Finanças November 16

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

3. QDai for FEUNL Difference between debt and equity debtequity

4. 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

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

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

7. 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.)

8. 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

9. 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

10. QDai for FEUNL Financial Leverage and EPS (2.00) 0.00 2.00 4.00 6.00 8.00 10.00 12.00 1,0002,0003,000 EPS EBIT in dollars, no taxes

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

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

13. 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

14. 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

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

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