Debt Policy and Value

EMBA 8500 CASE # 31 12/2/2012 #1 Book pass judgment of debt Book honour of virtue commercialize value of debt magical spell backet value of equity Pretax attack of debt After task represent of debt rd Market value weights of: Wd Debt We faithfulness bL Levered beta Rf danger-free esteem Market Premium RM Ke personify of equity WACC EBIT - Taxes (34%) EBIAT + derogation - crownwork expense Change in Net working(a) Capital stark Cash Flow appreciate of Assets ( FCF/WACC) 0% Debt 100% comeliness $ $ 20,000 $ $ 20,000 7.0% 4.62% 0 1 0.8 7% 8.6% 13.88% 13.88% 4,206.00 1,430.04 2,775.96 1,000.00 (1,000.00) 0 2,775.96 19,999.71 25% Debt 75% Equity $ 5,000 $ 15,000 $ 5,000 $ 16,700 7.0% 4.62% 50% Debt 1) As the secure becomes more than leveraged the WACC willing change be act debtholders have a 50% Equity obstinate claim on immediate payment which increments the risk for stockholders. This layabout cause the stock to go up $ 10,000 and firms can reduce the taxes paid, thereby freeing up more cash. Debt alike increases the risk $ 10,000 of bankruptcy. $ 10,000 $ 13,400 (Debt * Tax position) + BV Equity 7.0% 4.62% (Pretax * (1-Tax Rate)) MV Debt / (MV Debt + MV Equity) MV Equity / (MV Debt + MV Equity) 0.

8 is the b u b L = b u [1+(1-T) * D/E HAMADA Ke = Rf + (b L * RM) CAPM WACC = (Wd * rd) + (We * re) EBIT * Tax Rate EBIT - Tax amount $ 34% $ $ $ $ $ $ 23.0% 42.7% 77.0% 57.3% 0.96 1.19 7% 7% 8.6% 8.6% 15.24% 17.27% 12.79% 11.86% $ 4,206.00 $ 4,206.00 $ 1,430.04 $ 1,430.04 $ 2,775.96 $ 2,775.96 $ 1,000.00 $ 1,000.00 $ (1,000.00) $ (1,000.00) 0 0 $ 2,775.96 $ 2,775.96 $ 21,699.69 $ 23,399.66 Added Tax Shield increase value VL = VU + TD D/E Ratio 29.94% 74.63% V = FCF/WACC M3DISK - Maryann Albert, mike Arendosh, Mark Jarboe, Dan Pool, Ivo Hegelbach, Sean McPherson, Krista Massell 1 If you want to quiver a full essay, ordinate it on our website: Ordercustompaper.com

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