COMM 122 Study Guide - Midterm Guide: Agency Cost, Share Repurchase, Indirect Costs

• School: Queen's University
• Department: Commerce
• Course: COMM 122
• Professor: Fatma Sonmez- Saryal

Document Summary

Proposition 1: value is unaffected by capital structure. Proposition 2: leverage increases the risk and return to shareholders. Indirect costs: agency, impaired ability to run business, difficult to quantify. Reducing costs: protective covenants, repurchase debt, consolidation of debt. Apv: side affects include tax subsidy, cost of issuance, finance distress costs, subsidies to debt financing, npv + pv of tax benefits/year. Fte: calculate levered cfs (cf-interest), pv, b/b+s, b/s, rs , value cfs at rs. Use wacc/fte: if b/b+s ratio applies to the project over the life of the project. Use apv: if the project"s debt is known over the life. When discounting ufcs with wacc your are finding vl, when discounting ufcs with ro means your are finding vu. Estimating discount rate (scale enhancing): 1) other firm"s rs , 2) other firm"s ro , 3) your firm"s rs , 4) your firm"s wacc.