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1、The McGraw-Hill Companies, Inc.,200115- 1Irwin/McGraw-HillIrwin/McGraw-HillChapter 15Fundamentals of Corporate Finance Third EditionThe Capital Structure DecisionBrealey Myers Marcusslides by Matthew WillIrwin/McGraw-HillThe McGraw-Hill Companies, Inc.,2001天马行空官方博客：http:/ ；QQ:1318241189；QQ群：17556963
2、2The McGraw-Hill Companies, Inc.,200115- 2Irwin/McGraw-HillTopics CoveredDebt and Value in a Tax Free Economy Capital Structure and Corporate Taxes Cost of Financial Distress Explaining Financial ChoicesThe McGraw-Hill Companies, Inc.,200115- 3Irwin/McGraw-HillM&M (Debt Policy Doesnt Matter)Modiglia
3、ni & MillerWhen there are no taxes and capital markets function well, it makes no difference whether the firm borrows or individual shareholders borrow. Therefore, the market value of a company does not depend on its capital structure.The McGraw-Hill Companies, Inc.,200115- 4Irwin/McGraw-HillM&M (De
4、bt Policy Doesnt Matter)AssumptionsBy issuing 1 security rather than 2, company diminishes investor choice. This does not reduce value if: Investors do not need choice, OR There are sufficient alternative securities Capital structure does not affect cash flows e.g.No taxesNo bankruptcy costsNo effec
5、t on management incentivesThe McGraw-Hill Companies, Inc.,200115- 5Irwin/McGraw-HillExample - River Cruises - All Equity FinancedM&M (Debt Policy Doesnt Matter)The McGraw-Hill Companies, Inc.,200115- 6Irwin/McGraw-HillExample cont. 50% debtM&M (Debt Policy Doesnt Matter)The McGraw-Hill Companies, In
6、c.,200115- 7Irwin/McGraw-HillExample - River Cruises - All Equity Financed - Debt replicated by investorsM&M (Debt Policy Doesnt Matter)The McGraw-Hill Companies, Inc.,200115- 8Irwin/McGraw-HillWeighted Average Cost of Capital without taxes (traditional view) rD VrDrEIncludes Bankruptcy RiskWACCThe
7、McGraw-Hill Companies, Inc.,200115- 9Irwin/McGraw-HillWeighted Average Cost of Capital without taxes (M&M view) rD VrDrEIncludes Bankruptcy RiskWACCThe McGraw-Hill Companies, Inc.,200115- 10Irwin/McGraw-HillFinancial Risk - Risk to shareholders resulting from the use of debt. Financial Leverage - In
8、crease in the variability of shareholder returns that comes from the use of debt. Interest Tax Shield- Tax savings resulting from deductibility of interest payments.C.S. & Corporate TaxesThe McGraw-Hill Companies, Inc.,200115- 11Irwin/McGraw-HillExample - You own all the equity of Space Babies Diape
9、r Co The company has no debt. The companys annual cash flow is $1,000, before interest and taxes. The corporate tax rate is 40%. You have the option to exchange 1/2 of your equity position for 10% bonds with a face value of $1,000. Should you do this and why?C.S. & Corporate TaxesThe McGraw-Hill Com
10、panies, Inc.,200115- 12Irwin/McGraw-HillC.S. & Corporate TaxesAll Equity1/2 DebtEBIT1,0001,000Interest Pmt 0 100 Pretax Income1,000 900Taxes 40% 400 360Net Cash Flow$600$540Total Cash FlowAll Equity = 600*1/2 Debt = 640*1/2 Debt = 640(540 + 100)Example - You own all the equity of Space Babies Diaper
11、 Co The company has no debt. The companys annual cash flow is $1,000, before interest and taxes. The corporate tax rate is 40%. You have the option to exchange 1/2 of your equity position for 10% bonds with a face value of $1,000. Should you do this and why?The McGraw-Hill Companies, Inc.,200115- 13
12、Irwin/McGraw-HillCapital StructurePV of Tax Shield =(assume perpetuity) D x rD x TcrD= D x TcExample:Tax benefit = 1000 x (.10) x (.40) = $40PV of 40 perpetuity = 40 / .10 = $400PV Tax Shield = D x Tc = 1000 x .4 = $400The McGraw-Hill Companies, Inc.,200115- 14Irwin/McGraw-HillCapital StructureFirm
13、Value = Value of All Equity Firm + PV Tax ShieldExampleAll Equity Value = 600 / .10 = 6,000PV Tax Shield = 400Firm Value with 1/2 Debt = $6,400The McGraw-Hill Companies, Inc.,200115- 15Irwin/McGraw-HillFinancial DistressCosts of Financial Distress - Costs arising from bankruptcy or distorted busines
14、s decisions before bankruptcy.Market Value =Value if all Equity Financed+ PV Tax Shield- PV Costs of Financial DistressThe McGraw-Hill Companies, Inc.,200115- 16Irwin/McGraw-HillFinancial DistressDebtMarket Value of The FirmValue of unlevered firmPV of interest tax shieldsCosts of financial distress
15、Value of levered firmOptimal amount of debtMaximum value of firmThe McGraw-Hill Companies, Inc.,200115- 17Irwin/McGraw-HillFinancial ChoicesTrade-off Theory - Theory that capital structure is based on a trade-off between tax savings and distress costs of debt.Pecking Order Theory - Theory stating that firms prefer to issue debt rather than equity if internal finance is insufficient.
