MGFC10H3 Chapter 18: Chapter 18 Notes
Document Summary
Chapter 18 valuation and capital budgeting for the levered firm notes. For perpetual debt, the value of the tax subsidy is tcb. (tc is the corporate tax rate, and b is the value of the debt. ) The material on valuation under corporate taxes is actually an application of the apv approach: the costs of financial distress. The possibility of financial distress, and bankruptcy is particular, arises with debt financing. Financial distress imposes costs, thereby lowering value: the costs of issuing new securities. Investment bankers participate in the public issuance of corporate debt. These bankers must be compensated for their time and effort, a cost that lowers the value of the project: subsidies to debt financing. The interest rate on debt issued by the provinces and the federal government is substantially below the yield on debt issued by risky private corporations. Frequently, corporations are able to obtain loan guarantees from government, lowering their borrowing costs to a government rate.
