FINA 2710 Chapter 16: Debt Policy
16 Jul 2019
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Document Summary
The value of a firm from two angles. Mm debt irrelevance proposition assumptions: capital markets have to be well functioning . Investors can borrow/lend on the same terms as firms. Capital markets are efficient: there are no taxes or costs of financial distress. How borrowing affects value in a tax free economy (example) 7: the river cruise example: proposed structure issue ,000 of debt with a 10% coupon and use the funds to repurchase 50,000 shares at a piece (restructuring) Value of firm = d+e= ,000 + ,000 = mill. How borrowing affects value in a tax free economy (example) 8 earnings and returns per share with debt. Even though the value of the firm remains unchanged, shareholders of the levered firm face a higher financial risk and therefore demand a higher return. How borrowing affects value in a tax free economy (example) How borrowing affects value in a tax free economy.
