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1、ChapterOutline 15 1TheCapital StructureQuestionandThePieTheory15 2MaximizingFirmValueversusMaximizingStockholderInterests15 3FinancialLeverageandFirmValue AnExample15 4ModiglianiandMiller PropositionII NoTaxes 15 5Taxes15 6SummaryandConclusions TheCapital StructureQuestionandThePieTheory Thevalueofa
2、firmisdefinedtobethesumofthevalueofthefirm sdebtandthefirm sequity V B S ValueoftheFirm S B Ifthegoalofthemanagementofthefirmistomakethefirmasvaluableaspossible thethefirmshouldpickthedebt equityratiothatmakesthepieasbigaspossible TheCapital StructureQuestion Therearereallytwoimportantquestions Whys
3、houldthestockholderscareaboutmaximizingfirmvalue Perhapstheyshouldbeinterestedinstrategiesthatmaximizeshareholdervalue Whatistheratioofdebt to equitythatmaximizestheshareholder svalue Asitturnsout changesincapitalstructurebenefitthestockholdersifandonlyifthevalueofthefirmincreases FinancialLeverage
4、EPS andROE CurrentAssets 20 000Debt 0Equity 20 000Debt Equityratio0 00Interestraten aSharesoutstanding400Shareprice 50 Proposed 20 000 8 000 12 0002 38 240 50 Consideranall equityfirmthatisconsideringgoingintodebt Maybesomeoftheoriginalshareholderswanttocashout EPSandROEUnderCurrentCapitalStructure
5、RecessionExpectedExpansionEBIT 1 000 2 000 3 000Interest000Netincome 1 000 2 000 3 000EPS 2 50 5 00 7 50ROA5 10 15 ROE5 10 15 CurrentSharesOutstanding 400shares EPSandROEUnderProposedCapitalStructure RecessionExpectedExpansionEBIT 1 000 2 000 3 000Interest640640640Netincome 360 1 360 2 360EPS 1 50 5
6、 67 9 83ROA5 10 15 ROE3 11 20 ProposedSharesOutstanding 240shares EPSandROEUnderBothCapitalStructures LeveredRecessionExpectedExpansionEBIT 1 000 2 000 3 000Interest640640640Netincome 360 1 360 2 360EPS 1 50 5 67 9 83ROA5 10 15 ROE3 11 20 ProposedSharesOutstanding 240shares All EquityRecessionExpect
7、edExpansionEBIT 1 000 2 000 3 000Interest000Netincome 1 000 2 000 3 000EPS 2 50 5 00 7 50ROA5 10 15 ROE5 10 15 CurrentSharesOutstanding 400shares FinancialLeverageandEPS 2 00 0 00 2 00 4 00 6 00 8 00 10 00 12 00 1 000 2 000 3 000 EPS Debt NoDebt Break evenpoint EBIindollars notaxes Advantagetodebt D
8、isadvantagetodebt EBIT AssumptionsoftheModigliani MillerModel HomogeneousExpectationsHomogeneousBusinessRiskClassesPerpetualCashFlowsPerfectCapitalMarkets PerfectcompetitionFirmsandinvestorscanborrow lendatthesamerateEqualaccesstoallrelevantinformationNotransactioncostsNotaxes HomemadeLeverage AnExa
9、mple RecessionExpectedExpansionEPSofUnleveredFirm 2 50 5 00 7 50Earningsfor40shares 100 200 300Lessintereston 800 8 64 64 64NetProfits 36 136 236ROE NetProfits 1 200 3 11 20 Wearebuying40sharesofa 50stockonmargin WegetthesameROEasifweboughtintoaleveredfirm Ourpersonaldebtequityratiois Homemade Un Le
10、verage AnExample RecessionExpectedExpansionEPSofLeveredFirm 1 50 5 67 9 83Earningsfor24shares 36 136 236Plusintereston 800 8 64 64 64NetProfits 100 200 300ROE NetProfits 2 000 5 10 15 Buying24sharesofanother wiseidenticalleveredfirmalongwiththesomeofthefirm sdebtgetsustotheROEoftheunleveredfirm This
11、isthefundamentalinsightofM M TheMMPropositionsI II NoTaxes PropositionIFirmvalueisnotaffectedbyleverageVL VUPropositionIILeverageincreasestheriskandreturntostockholdersrs r0 B SL r0 rB rBistheinterestrate costofdebt rsisthereturnon levered equity costofequity r0isthereturnonunleveredequity costofcap
12、ital BisthevalueofdebtSListhevalueofleveredequity TheMMPropositionI NoTaxes Thederivationisstraightforward ThepresentvalueofthisstreamofcashflowsisVL ThepresentvalueofthisstreamofcashflowsisVU TheMMPropositionII NoTaxes Thederivationisstraightforward TheCostofEquity theCostofDebt andtheWeightedAvera
13、geCostofCapital MMPropositionIIwithNoCorporateTaxes Debt to equityRatio Costofcapital r r0 rB rB TheMMPropositionsI II withCorporateTaxes PropositionI withCorporateTaxes FirmvalueincreaseswithleverageVL VU TCBPropositionII withCorporateTaxes Someoftheincreaseinequityriskandreturnisoffsetbyinterestta
14、xshieldrS r0 B S 1 TC r0 rB rBistheinterestrate costofdebt rSisthereturnonequity costofequity r0isthereturnonunleveredequity costofcapital BisthevalueofdebtSisthevalueofleveredequity TheMMPropositionI Corp Taxes ThepresentvalueofthisstreamofcashflowsisVL ThepresentvalueofthefirsttermisVUThepresentva
15、lueofthesecondtermisTCB TheMMPropositionII Corp Taxes StartwithM MPropositionIwithtaxes Since Thecashflowsfromeachsideofthebalancesheetmustequal DividebothsidesbyS Whichquicklyreducesto TheEffectofFinancialLeverageontheCostofDebtandEquityCapital Debt to equityratio B S Costofcapital r r0 rB TotalCas
16、hFlowtoInvestorsUnderEachCapitalStructurewithCorp Taxes All EquityRecessionExpectedExpansionEBIT 1 000 2 000 3 000Interest000EBT 1 000 2 000 3 000Taxes Tc 35 350 700 1 050TotalCashFlowtoS H 650 1 300 1 950 LeveredRecessionExpectedExpansionEBIT 1 000 2 000 3 000Interest 800 8 640640640EBT 360 1 360 2 360Taxes Tc 35 126 476 826TotalCashFlow 234 640 468 640 1 534 640 tobothS H B H 874 1 524 2 174EBIT 1 Tc TCrBB 650 224 1 300 224 1 950 224 874 1 524 2 174 TotalCashFlowtoInvestorsUnderEachCapitalStru
