Textbook Notes (369,140)
Canada (162,411)
Finance (37)
MGFC10H3 (13)
Derek Chau (13)
Chapter 16

Chapter 16 Notes

1 Page

Course Code
Derek Chau

This preview shows half of the first page. Sign up to view the full page of the document.
Chapter 16 Capital Structure Basic Concepts Notes161 The Capital Structure Question and the Pie Theorypie modelmodel of firms debtequity ratio graphically depicts slices of pie that represent value of firm in capital marketsthe value of the firm V is VBS where B is the market value of the debt and S is the market value of the equityif company managements goal is to make the firm as valuable as possible then the firm should pick the debtequity ratio that makes the piethe total value of the company Vas big as possible163 Financial Leverage and Firm Value An ExampleThe Choice Between Debt and EquityMM Proposition Ia proposition of Modigliani and Miller MM stating that a firm cannot change the total value of its outstanding securities by changing its capital structure proportions also called an irrelevance resultMM Proposition I no taxes the value of the levered firm is the same as the value of the unlevered firm164 Modigliani and Miller Proposition II No TaxesProposition II Required Return to Equityholders Rises with LeverageMM Proposition IIa proposition of MM stating that the cost of equity is a linear function of the firms debtequity ratior0expected earnings to unlevered firmunlevered equityMM Proposition II no taxes rrBS rrS00B165 TaxesValue of the Levered FirmVEBIT1Tr where V is the present value of an unlevered firm EBIT1T is the firm cash flows after UC0UCcorporate taxes T is corporate tax rate and ris the cost of capital to an allequity firmC0 MM Proposition II corporate taxes VEBIT1TrTrBrVTBLC0CBBUCMM Proposition II corporate taxesa proposition of Modigliani and Miller MM stating that by raising the debtequity ratio a firm can lower its taxes and thereby increase its total value capital structure does matterExpected Return and Leverage under Corporate TaxesMM Proposition II corporate taxes rrBS1TrrS0C0BSEBITrB1TrBCSthe numerator is the expected cash flow to
More Less
Unlock Document

Only half of the first page are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.