FNCE30002 Lecture 3: WACC
27 Jun 2018
School
Department
Course
Professor
Topic3homes withWALL acapitalstructurePolicy
Emmmmmm
No calculate ODetermine
permanent
sources
of
capital
Cart
eachcomponent
ofcapital
Weighteachcomponent
After
taxkd beforetax kd xItt ewhere to tell x
WACE keEtRduteDILEND
OburvedcapitalNhtucturefractiies
capitastructuredfinancing
decisionsareimportant
interestis tax deductible Mojnificant
advantage
of
debt
too muchdebtis riskydshouldbeavoided
name amtsprovidebetterdebt
capacity
Modiapianivanitter
Conservationof
value VEVu
Combination
ofrisk includingriskydebts
onlyaffects
how
expected
returnsaresplit
btw
dham
Taxes
Faanical Taxsystem leverage 4Vbecome
interest is tax deductible V
EV
utters
Imputationdivestaxed 81
hmarginaltaxrate tita but totag to tag
ie maybe ataxinducedreason tocrime
equity
TradeoffThearyL
Tradeoffbtwopposingeffects
ofbenefits
of
debtacore
of
findistress
May optimal capitalstructure
emits
EVutPVtaxrhields PVlbankruftcycorts
P
rot
thindistress xcosts
incurred
leaplains INTERindustryvariation via bunionmile
Pecking0rderTheay
Mgmt has more
infothan mkt mhtbooks
formgmtsignals mgmtreluctant to
innerequityInignals
overvaluation butinning debtalso
has
problems
ve intra industry
correlationbtw
profitability leverage
ExplainsINTRA industry
variation viaprofitability
Nontaximpoatsoncapitalstowett
High
profitofgeneral are ants ableto borrowmore
High
profitoftangibleassets able toborrowmore
Free can flaw
Anet substitution
problem highrim we NPV
projects
when Fb THwin bk
equity
still
has
value
Underinvestment
problemclose
tobankruptcy sofarupthe NP
V
projects
