COMMERCE 3FA3 Lecture 6: Chapter 14 pt 6
27 Feb 2018
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Concept: an investor can create your own capital structure for a company: you want to increase d/e ratio of the company and you have to invest. Invest and buy shares: borrow money and buy more shares, personal d/e goes up has the same effect as company d/e goes up. Increase d/e: borrow and invest money: the company has too high d/e ratio. Invest less than in shares of company: take the uninvested portion of your original and invest in risk free investment (eg. T-bill: decrease d/e: lend a portion of your money. If company is very profitable then adding debt will increase roe (return on equity) If company is unprofitable or has low profits. Company has a value of million and they are reviewing two different capital structure options. Projected ebit is million: calculate net income under each plan. Eps = earnings per share (maximize) = net income/# shares.
