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1、CHAPTER16CAPITALSTRUCTUREObjectivesTounderstandhowafirmcancreatevaluethroughitsfinancingdecisions.Toshowhowtotakeaccountofafirmsfinancingmixinevaluatinginvestmentdecisions.Outline16.1 InternalversusExternalFinancing16.2 EquityFinancing16.3 DebtFinancing16.4 TheIrrelevanceofCapitalStructureinaFrictio
2、nlessEnvironment16.5 CreatingValuethroughFinancingDecisions16.6 ReducingCosts16.7 DealingwithConflictsofInterest16.8 CreatingNewOpportunitiesforStakeholders16.9 FinancingDecisionsinPractice16.10 HowtoEvaluateLeveredInvestmentsSummaryExternalfinancingsubjectsacorporationsinvestmentplansmoredirectlyto
3、thedisciplineofthecapitalmarketthaninternalfinancingdoes.Debtfinancinginitsbroadestsenseincludesloansanddebtsecurities,suchasbondsandmortgages,aswellasotherpromisesoffuturepaymentbythecorporation,suchasaccountspayable,leases,andpensions.Inafrictionlessfinancialenvironment,wheretherearenotaxesortrans
4、actioncosts,andcontractsarecostlesstomakeandenforce,thewealthofshareholdersisthesamenomatterwhatcapitalstructurethefirmadopts.Intherealworldthereareanumberoffrictionsthatcancausecapitalstructurepolicytohaveaneffectonthewealthofshareholders.Theseincludetaxes,regulations,andconflictsofinterestbetweent
5、hestakeholdersofthefirm.Afirmsmanagementmightthereforebeabletocreateshareholdervaluethroughitscapitalstructuredecisionsinoneofthreeways:Byreducingtaxcostsorthecostsofburdensomeregulations.Byreducingpotentialconflictsofinterestamongvariousstakeholdersinthefirm.Byprovidingstakeholderswithfinancialasse
6、tsnototherwiseavailabletothem.Therearethreealternativemethodsusedinestimatingthenetpresentvalueofaninvestmentprojecttotakeaccountoffinancialleverage:theadjustedpresentvaluemethod,theflowstoequitymethod,andtheweightedaveragecostofcapitalmethodSolutionstoProblemsatEndofChapterDebt-EquityMix1.DividoCor
7、porationisanall-equityfinancedfirmwithatotalmarketvalueof$100million.Thecompanyholds$10millionincash-equivalentsandhas$90millioninotherassets.Thereare1,000,000sharesofDividocommonstockoutstanding,eachwithamarketpriceof$100.DividoCorporationhasdecidedtoissue$20millionofbondsandtorepurchase$20millionw
8、orthofitsstock.a. Whatwillbetheimpactonthepriceofitssharesandonthewealthofitsshareholders?Why?b. AssumethatDividosEBIThasanequalprobabilityofbeing$20million,or$12million,or$4million.Showtheimpactofthefinancialrestructuringontheprobabilitydistributionofearningspershareintheabsenceoftaxes.Whydoesthefa
9、ctthattheequitybecomesriskiernotnecessarilyaffectshareholderwealth?SOLUTION:a. InanM&Mfrictionlessenvironment,wheretherearenotaxesandcontractsarecostlesstomakeandenforce,thewealthofshareholdersisthesamenomatterwhatcapitalstructurethefirmadopts.Insuchanenvironment,neitherthestockpricenorshareholdersw
10、ealthwouldbeaffected.IntherealworldDividosmanagementmightbeabletocreateshareholdervaluebyissuingdebtandrepurchasingsharesintwoways:ByreducingtaxcostsByreducingthefreecashflowavailabletomanagementandexposingitselftogreatermarketdiscipline.b. TheformulaforEPSwithoutdebtis:EPSl equity=EBIT1,000,000shar
11、esTheinterestpaymentswillbe$1.2millionperyear(.06x$20million)regardlessoftherealizedvalueofEBI工Thenumberofsharesoutstandingafterexchangingdebtforequitywillbe800,000.EPSwithdebtistherefore:EP总thdebt=NetEarnings=EBIT$1.2million800,000shares800,000sharesProbabilityDistributionofDividosEBITandEPSStateof
12、theEconomyEBITAllequityfinancingWith$20millionofdebtEPS(1millionshares)NetEarningsEPS(800,000shares)Badbusiness$4million$4pershare$2.8million$3.50pershareNormalbusiness121210.813.50Goodbusiness202018.823.50Mean121210.813.50Standarddeviation$6.53$8.16Althoughthesharesofstockbecomeriskierwithdebtfinan
13、cing,theexpectedearningspersharegoup.Inafrictionlessfinancialenvironment,theneteffectistoleavethepriceofthestockunaffected.Leasing2. PlentileaseandNoleasearevirtuallyidenticalcorporations.TheonlydifferencebetweenthemisthatPlentileaseleasesmostofitsplantandequipmentwhereasNoleasebuysitsplantandequipm
14、entandfinancesitbyborrowing.Compareandcontrasttheirmarket-valuebalancesheets.SOLUTION:Market-ValueBalanceSheetsofNoleaseandPlentileaseCorporationsa.NoleaseCorporationAssetsLiabilitiesandShareholdersEquityPlantandequipmentBondsOtherassetsEquityTotalTotalb.PlentileaseCorporationAssetsLiabilitiesandSha
15、reholdersEquityPlantandequipmentLeaseOtherassetsEquityTotalTotalThemaindifferencebetweenthebondsandtheleaseasaformofdebtfinancingiswhobearstheriskassociatedwiththeresidualmarketvalueoftheleasedassetattheendofthetermofthelease.SinceNoleaseCorporationhasboughtitsequipment,itbearsthisrisk.InPlentileasescase,however,itisthelessorthatbearsthisresidual-valuerisk.PensionLiabilities3. EuropensandAsiapensarevirtuallyidenticalcorporations.TheonlydifferencebetweenthemisthatEuropenshasacompletelyunfundedpensionplan,andAsiapenshasafullyfund
