Lecture Fundamentals of corporate finance - Chapter 16: Financial leverage and capital structure policy

T16.1 Chapter Outline Chapter 16 Financial Leverage and Capital Structure Policy Chapter Organization 16.1 The Capital Structure Question 16.2 The Effect of Financial Leverage 16.3 Capital Structure and the Cost of Equity Capital 16.4 M&M Propositions I and II with Corporate Taxes 16.5 Bankruptcy Costs 16.6 Optimal Capital Structure 16.7 The Pie Again 16.8 Observed Capital Structures 16.9 Long-term Financing under Financial Distress and Bankruptcy 16.10 Summary and Conclusions SPACEBAR TO ADVANCE copyright © 2002 McGraw­Hill Ryerson, Ltd. T16.2 Capital Structure, Cost of Capital, and the Value of the Firm Key issues: What is the relationship between capital structure and firm value? Measuring Capital Structure - Leverage and the Debt/Equity ratio What is the optimal capital structure? Preliminaries: Capital restructurings Optimal capital structure: firm value vs. stock value Optimal capital structure: firm value vs. WACC copyright © 2002 McGraw­Hill Ryerson, Ltd Slide 2 T16.3 Example: Computing Break-Even EBIT Ignoring taxes: A. With no debt: EPS = EBIT/500,000 B. With $2,500,000 in debt at 10%: EPS = (EBIT - $______)/250,000 C. These are equal when: EPSBE = EBITBE/______= (EBITBE - $250,000)/250,000 D. With a little algebra: EBITBE = $500,000 So EPSBE = $___ /share copyright © 2002 McGraw­Hill Ryerson, Ltd Slide 3 T16.3 Example: Computing Break-Even EBIT Ignoring taxes: A. With no debt: EPS = EBIT/500,000 B. With $2,500,000 in debt at 10%: EPS = (EBIT - $250,000)/250,000 C. These are equal when: EPSBE = EBITBE/500,000= (EBITBE - $250,000)/250,000 D. With a little algebra: EBITBE = $500,000 So EPSBE = $1.00/share copyright © 2002 McGraw­Hill Ryerson, Ltd Slide 4 T16.4 Financial Leverage, EPS and EBIT EPS ($) 3 D/E = 1 2.5 2 D/E = 0 1.5 1 0.5 0 – 0.5 – 1 0 0.2 0.4 0.6 0.8 EBIT ($ millions, no 1 taxes) copyright © 2002 McGraw­Hill Ryerson, Ltd Slide 5 ... - tailieumienphi.vn