Presentation is loading. Please wait.

Presentation is loading. Please wait.

QDai for FEUNL Finance I November 21. QDai for FEUNL Topics covered  Last class: MM without taxes  This class: MM with corporate taxes.

Published by Modified over 9 years ago

Similar presentations

Presentation on theme: "QDai for FEUNL Finance I November 21. QDai for FEUNL Topics covered  Last class: MM without taxes  This class: MM with corporate taxes."— Presentation transcript:

1 QDai for FEUNL Finance I November 21

2 QDai for FEUNL Topics covered  Last class: MM without taxes  This class: MM with corporate taxes

3 QDai for FEUNL The MM Propositions I & II (No Taxes)  Proposition I Firm value is not affected by leverage  Proposition II Leverage increases the risk and return to stockholders

4 QDai for FEUNL MM Proposition II with No Corporate Taxes Debt-to-equity Ratio Cost of capital: r (%) r0r0 rBrB rBrB S B

5 QDai for FEUNL The MM Proposition I (Corp. Taxes)  Shareholders receiveBondholders receive  The total cashflow to all the stakeholders is  The present value of the stream of cashflow is

6 QDai for FEUNL The MM Proposition II (Corp. Taxes) Start with M&M Proposition I with taxes: The balancen sheet of a levered firm can be written as

7 QDai for FEUNL The MM Proposition II (Corp. Taxes) The cash flows from each side of the balance sheet must equal

8 QDai for FEUNL The MM Propositions I & II (with Taxes)  Proposition I (with Corporate Taxes) Firm value increases with leverage  Proposition II (with Corporate Taxes) Some of the increase in equity risk and return is offset by interest tax shield

9 QDai for FEUNL The Effect of Financial Leverage on the Cost of Debt and Equity Capital with Corporate Taxes Debt-to-equity ratio (B/S) Cost of capital: r (%) r0r0 rBrB

10 QDai for FEUNL Total Cash Flow to Investors Under Each Capital Structure with Corp. Taxes All-Equity RecessionExpectedExpansion EBIT$1,000$2,000$3,000 Interest EBT Taxes (Tc = 35%) Total Cash Flow to S/H Levered RecessionExpectedExpansion EBIT$1,000$2,000$3,000 Interest ($800 @ 8% ) EBT Taxes (Tc = 35%) Total Cash Flow (to both S/H & B/H): EBIT(1-Tc)+T C r B B

11 QDai for FEUNL Tax effect of debt  In a world without taxes  When there are corporate taxes  With taxes, the sum of the debt plus the equity of the levered firm is

12 QDai for FEUNL Total Cash Flow to Investors All-equity firm Levered firm

13 QDai for FEUNL One question to ask Is it so that firms should then choose 100% debt in order to maximize the tax shield for the firm? In the next class, we will introduce a limit to debt: financial distress

Download ppt "QDai for FEUNL Finance I November 21. QDai for FEUNL Topics covered  Last class: MM without taxes  This class: MM with corporate taxes."

Similar presentations

Chapter Outline 15.1 The Capital-Structure Question and The Pie Theory

Chapter Outline 15.1 The Capital-Structure Question and The Pie Theory
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved 1 Chapter 16 Assessing Long-Term Debt, Equity, and Capital Structure McGraw-Hill/Irwin.

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved 1 Chapter 16 Assessing Long-Term Debt, Equity, and Capital Structure McGraw-Hill/Irwin.
Last Lecture.. Cost of Equity Cost of Preferred Stock Cost of Debt

Last Lecture.. Cost of Equity Cost of Preferred Stock Cost of Debt
McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Leverage and Capital Structure Chapter 13.

McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Leverage and Capital Structure Chapter 13.
Chapter Outline The Capital Structure Decision

Chapter Outline The Capital Structure Decision
Capital Structure Refers to the mix of debt and equity that a company uses to finance its business Capital Restructuring Capital restructuring involves.

Capital Structure Refers to the mix of debt and equity that a company uses to finance its business Capital Restructuring Capital restructuring involves.
Capital Structure: Theory and Practical Decision Making How do firms choose Capital Structures? Can managers affect firm value by employing different debt/equity.

Capital Structure: Theory and Practical Decision Making How do firms choose Capital Structures? Can managers affect firm value by employing different debt/equity.
Capital Structure Decision

Capital Structure Decision
Capital Structure: Basic Concepts

Capital Structure: Basic Concepts
Solvay Business School – Université Libre de Bruxelles 11/06/2015Vietnam 20041 Corporate Finance Choosing a Capital Structure Prof. André Farber Solvay.

Solvay Business School – Université Libre de Bruxelles 11/06/2015Vietnam Corporate Finance Choosing a Capital Structure Prof. André Farber Solvay.
Capital Structure II Corporate income taxes. Review question  Describe the two basic capital budgeting decisions.

Capital Structure II Corporate income taxes. Review question  Describe the two basic capital budgeting decisions.
Corporate Finance Lecture 7. Topics covered Weighted Average Cost of Capital Weighted Average Cost of Capital Long term financing with equity Long term.

Corporate Finance Lecture 7. Topics covered Weighted Average Cost of Capital Weighted Average Cost of Capital Long term financing with equity Long term.
Review. Review Item  An firm has a project with NPV>0 that costs a lot of money.  It pays off after the owner dies.  Should she invest? In the project?

Review. Review Item  An firm has a project with NPV>0 that costs a lot of money.  It pays off after the owner dies.  Should she invest? In the project?
QDai for FEUNL Finanças Nov 30. QDai for FEUNL Topics covered  Capital budgeting with debt Adjusted Present Value Approach Flows to Equity Approach Weighted.

QDai for FEUNL Finanças Nov 30. QDai for FEUNL Topics covered  Capital budgeting with debt Adjusted Present Value Approach Flows to Equity Approach Weighted.
QDai for FEUNL Finanças December 5. QDai for FEUNL Topics covered  An example of APV  Beta and leverage.

QDai for FEUNL Finanças December 5. QDai for FEUNL Topics covered  An example of APV  Beta and leverage.
Finanças Nov 28. Topics covered  Agency cost of equity  Pecking order theory  MM model with personal taxes  How firms construct financial structure.

Finanças Nov 28. Topics covered  Agency cost of equity  Pecking order theory  MM model with personal taxes  How firms construct financial structure.
Capital Structure II Corporate income taxes. Now with taxes.  No threat of bankruptcy.  Corporate taxes, not personal.  Government gets a piece of.

Capital Structure II Corporate income taxes. Now with taxes.  No threat of bankruptcy.  Corporate taxes, not personal.  Government gets a piece of.
Chapter 4. We will want to answer questions about the firm’s n Liquidity n Efficient use of Assets n Leverage (financing) n Profitability.

Chapter 4. We will want to answer questions about the firm’s n Liquidity n Efficient use of Assets n Leverage (financing) n Profitability.
QDai for FEUNL Finane I November 23. QDai for FEUNL Topics covered  Cost of financial distress Direct cost Indirect cost  Reducing cost of debt  Integration.

QDai for FEUNL Finane I November 23. QDai for FEUNL Topics covered  Cost of financial distress Direct cost Indirect cost  Reducing cost of debt  Integration.
© K. Cuthbertson and D. Nitzsche Figures for Chapter 11 VALUING FIRMS : CAPITAL STRUCTURE AND THE COST OF CAPITAL (Investments : Spot and Derivatives Markets)

© K. Cuthbertson and D. Nitzsche Figures for Chapter 11 VALUING FIRMS : CAPITAL STRUCTURE AND THE COST OF CAPITAL (Investments : Spot and Derivatives Markets)

Similar presentations

Ads by Google