FIN 401 Lecture Notes - Lecture 5: Capital Structure, Cash Flow, M-Theory
Document Summary
Fin401 class 5 notes (part 1: example #3b - homemade leverage, decrease leverage, suppose the firm in example 1 does change its capital structure, an investor owns worth of the firm"s shares. If the investor prefers the roes of the proposed capital structure, what could the investor do: example #3 - solution, step 1: determine whether the investor should borrow or lend. Firms choice of leverage: d/v = 4m / 8m. Investor"s roe = (firm eos x investor"s shares - interest payment) / investor"s equity: = (3 x 50 +1000 x 10%) / 2000, = 12. 5% Firm"s all equity eps = ,000 / 5000 = . 00: amy"s total cash flow = x (500 + 750) - 22,500 x 6% = ,900. 00. I(cid:374)(cid:448)esto(cid:396)s (cid:272)a(cid:374) al(cid:449)ays u(cid:374)do fi(cid:396)(cid:373)"s (cid:272)apital structure decision by borrowing or lending on their own. If firm stays all-equity but an investor prefers the capital structure with debt: she should borrow and buy more shares.
