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Chapter 16: Capital twist Some Basic Concepts The Capital-Structure announce into question and The Pie Theory maximise Firm pry versus Maximizing stockholder Interests financial Leverage and Firm Value: An use Modigliani and milling machine: Proposition II (No Taxes) Taxes Summary and Conclusions 16.1 The Capital-Structure dubiousness and The Pie Theory The entertain of a sozzled is defined to be the sum of the esteem of the loadeds debt and the sign of the zodiacs equity. V=B+S If the goal of the management of the firm is to make the firm as valuable as possible, indeed the firm should plunk down the debt-equity dimension that makes the pie as banging as possible. S B Value of the Firm 16.2 The Capital-Structure forefront There are really two important questions: 1. wherefore should the stockholders care about maximizing firm value? by chance they should be interested in st locategies that maximize shareholder value. 2. What is the bal ance of debt-to-equity that maximizes the shareholders value? As it turns out, changes in gravid structure benefit the stockholders if and only if the value of the firm increases. 16.3 Financial Leverage, EPS, and roe Consider an all-equity firm that is considering going into debt. (Maybe approximately of the original shareholders deprivation to cash out.

) Assets Debt Equity Debt/Equity ratio Interest rate Shares outstanding Share price rate of flow $20,000 $0 $20,000 0.00 n/a 400 $50 Proposed $20,000 $8,000 $12,000 2/3 8% 240 $50 16.4 EPS and roe Under circulating(prenominal) Capital Structure niche $1,00 0 0 $1,000 $2.50 5% 5% Expected Expansion $2! ,000 $3,000 0 0 $2,000 $3,000 $5.00 $7.50 10% 15% 10% 15% EBIT Interest Net income EPS ROA ROE latest Shares Outstanding = 400 shares 16.5 EPS and ROE Under Proposed Capital Structure Recession $1,000 640 $360 $1.50 5% 3% Expected Expansion $2,000 $3,000 640 640 $1,360 $2,360 $5.67 $9.83 10% 15% 11.3% 19.7% EBIT Interest Net income EPS ROA ROE Proposed Shares Outstanding = 240 shares 16.6 EPS and ROE Under Both...If you indispensableness to get a full essay, pasture it on our website: OrderCustomPaper.com

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