COMM 122 Study Guide - Forward Contract, Tender Offer, Preferred Stock
Document Summary
16. 1: pie model: value of firm (v) = market value of debt (b) + market value of equity (s) S (r0 rb) r0 = cost of capital for an all-equity firm = T c rb b r b: after-tax cash flow in levered firms = ebit x (1 - tc) tc r b b, vu = Ebit x( c ) r 0: vu = present value of an unlevered firm, r0 = the cost of capital to an all-equity firm, mm proposition i (corporate taxes, vl = = vu + tcb: mm proposition ii (corporate taxes, rs = r0 + S x (1 tc) x (rc rb: levered equity = s = 31. 1: financial distress: occurs when a firm"s operating cash flows are not sufficient to satisfy current obligations and the firm is forced to take corrective action, dividend reductions, plant closings, losses, layoffs, ceo resignation, plummeting stock prices.
