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© 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 Figure 11.1 : Traditional view : cost of capital Cost of capital Debt-to equity ratio (B/S) Equity, R S WACC Debt, R b (B/S)*
© K. Cuthbertson and D. Nitzsche Figure 11.2 : How leverage affects equity returns Equity return, R S Earnings, Y i As earnings Y i change from 1m to 4m, the equity return R S for the all equity financed firm moves from 10% to 40% (A to B) but for the 50% levered firm the equity return changes much more, from 10% to 70% (A’ to C). 10% 20% 30% 40% 70% 1m4m0.5m C A’ B A 50% equity (50% debt) 100% equity (0% debt)
© K. Cuthbertson and D. Nitzsche Figure 11.3 : Value of the firm : MM proposition I (no taxes) Value of firm, V Debt-to equity ratio (B/S) V V is independent of B/S
© K. Cuthbertson and D. Nitzsche Figure 11.4 : The cost of equity finance : MM proposition II (no taxes) Cost of capital Debt-to equity ratio (B/S) WACC, R w RbRb (B/S)* R S = R w + (R w -R b ) (B/S) Debtholders share some of the business risk Cost of equity rises with rising debt-to-equity ratio
© K. Cuthbertson and D. Nitzsche Figure 11.5 : Value of the firm : MM proposition I (no taxes and bankruptcy) Value of firm, V Debt-to equity ratio (B/S) MM no taxes Optimal debt-to equity-ratio MM with corporate taxes only MM with corporate taxes and bankruptcy costs
Capital Structure Decisions Chapter 15 and 16
The McGraw-Hill Companies, Inc., 2000
Capital Structure: Limits to the Use of Debt
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
McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Leverage and Capital Structure Chapter 13.
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 Basic concepts: no taxes. Chapter 15 Capital Structure: Basic Concepts Capital-structure and pie theory No-arbitrage pricing.
Copyright K. Cuthbertson and D. Nitzsche 1 Lecture Capital Structure and the Modigliani-Miller Propositions 11/9/2001.
Does Debt Policy Matter? Student Presentations Capital Structure Considerations Modigliani and Miller – Propositions 1 and 2 Financial Risk and Expected.
Capital Structure Decision
Capital Structure: Basic Concepts
© K. Cuthbertson and D. Nitzsche Figures for Chapter 10 PORTFOLIO THEORY AND ASSET RETURNS (Investments : Spot and Derivatives Markets)
Capital Structure II Corporate income taxes. Review question Describe the two basic capital budgeting decisions.
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?
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.
© K. Cuthbertson and D. Nitzsche Figures for Chapter 12 FUTURES OPTIONS (Financial Engineering : Derivatives and Risk Management)
Capital Structure (Ch. 12)
Chapter 12 Capital Structure Quick Review of Capital Markets Benefits of Borrowing Pecking Order Hypothesis Modigliani and Miller Optimal Capital.
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