Debt Policy and Value

EMBA 8500 1 Book comfort of debt Book value of equity Market value of debt Market value of equity Pretax salute of debt After Tax cost of debt rd Market value weights of Wd Debt We truth bL Levered beta Rf Risk-free estimate Market Premium RM Ke Cost of equity WACC EBIT Taxes (34%) EBIAT + Depreciation Capital cost Change in Net Working Capital Free exchange Flow Value of Assets ( FCF/WACC) CASE 31 0% Debt 100% Equity $ $ 20,000 $ $ 20,000 7. 0% 4. 62% $ 34% $ $ $ $ $ $ 0 1 0. 8 7% 8. 6% 13. 88% 13. 88% 4,206. 00 1,430. 04 2,775. 96 1,000. 00 (1,000. 00) 0 2,775. 96 19,999. 1 25% Debt 75% Equity $ 5,000 $ 15,000 $ 5,000 $ 16,700 7. 0% 4. 62% 12/2/2012 50% Debt 1) As the firm becomes more leveraged the WACC will change because debtholders train a 50% Equity fixed claim on bullion which increases the bump for stockholders. This seat cause the stock to go up $ 10,000 and firms can reduce the taxes paid, thereby freeing up more cash. Debt also increases the risk $ 10,000 of bankruptcy. $ 10,000 $ 13,400 (Debt * Tax Rate) + BV Equity 7. 0% 4. 62% (Pretax * (1-Tax Rate)) 23. 0% 42. 7% 77. 0% 57. 3% 0. 96 1. 19 7% 7% 8. 6% 8. 6% 15. 24% 17. 27% 12. 79% 11. 6% $ 4,206. 00 $ 4,206. 00 $ 1,430. 04 $ 1,430. 04 $ 2,775. 96 $ 2,775. 96 $ 1,000. 00 $ 1,000. 00 $ (1,000. 00) $ (1,000. 00) 0 0 $ 2,775. 96 $ 2,775. 96 $ 21,699. 69 $ 23,399. 66 Added Tax vindication increase value VL = VU + TD MV Debt / (MV Debt + MV Equity) MV Equity / (MV Debt + MV Equity) 0. 8 is the b u b L = b u 1+(1-T) * D/E HAMADA D/E Ratio 29. 94% 74. 63% Ke = Rf + (b L * RM) CAPM WACC = (Wd * rd) + (We * re) EBIT * Tax Rate EBIT Tax amount V = FCF/WACC M3DISK Maryann Albert, Mike Arendosh, Mark Jarboe, Dan Pool, Ivo Hegelbach, Sean McPherson, Krista Massell 1