【精】lecture15TheCapitalStructureDecision

©TheMcGraw-HillCompanies,Inc.,200115-1Irwin/McGraw-HillIrwin/McGraw-HillChapter15FundamentalsofCorporateFinanceThirdEditionTheCapitalStructureDecisionBrealeyMyersMarcusslidesbyMatthewWillIrwin/McGraw-Hill©TheMcGraw-HillCompanies,Inc.,2001©TheMcGraw-HillCompanies,Inc.,200115-2Irwin/McGraw-HillTopicsCoveredDebtandValueinaTaxFreeEconomyCapitalStructureandCorporateTaxesCostofFinancialDistressExplainingFinancialChoices©TheMcGraw-HillCompanies,Inc.,200115-3Irwin/McGraw-HillM&M(DebtPolicyDoesn’tMatter)Modigliani&MillerWhentherearenotaxesandcapitalmarketsfunctionwell,itmakesnodifferencewhetherthefirmborrowsorindividualshareholdersborrow.Therefore,themarketvalueofacompanydoesnotdependonitscapitalstructure.©TheMcGraw-HillCompanies,Inc.,200115-4Irwin/McGraw-HillM&M(DebtPolicyDoesn’tMatter)AssumptionsByissuing1securityratherthan2,companydiminishesinvestorchoice.Thisdoesnotreducevalueif:Investorsdonotneedchoice,ORTherearesufficientalternativesecuritiesCapitalstructuredoesnotaffectcashflowse.g...NotaxesNobankruptcycostsNoeffectonmanagementincentives©TheMcGraw-HillCompanies,Inc.,200115-5Irwin/McGraw-HillExample-RiverCruises-AllEquityFinanced17.5%12.5%7.5%sharesonReturn1.751.25$.75shareperEarnings175,000125,000$75,000IncomeOperatingBoomExpectedSlumpEconomytheofStateOutcomemillion1$SharesofValueMarket$10shareperPrice100,000sharesofNumberDataM&M(DebtPolicyDoesn’tMatter)©TheMcGraw-HillCompanies,Inc.,200115-6Irwin/McGraw-HillExamplecont.50%debt25%15%5%sharesonReturn2.501.50$.50shareperEarnings125,00075,000$25,000earningsEquity50,00050,000$50,000Interest175,000125,000$75,000IncomeOperatingBoomExpectedSlumpEconomytheofStateOutcome500,000$debtofueMarketval500,000$SharesofValueMarket$10shareperPrice50,000sharesofNumberDataM&M(DebtPolicyDoesn’tMatter)©TheMcGraw-HillCompanies,Inc.,200115-7Irwin/McGraw-HillExample-RiverCruises-AllEquityFinanced-Debtreplicatedbyinvestors25%15%5%investment$10onReturn2.501.50$.50investmentonearningsNet1.001.00$1.0010%@Interest:LESS3.502.50$1.50sharestwoonEarningsBoomExpectedSlumpEconomytheofStateOutcomeM&M(DebtPolicyDoesn’tMatter)©TheMcGraw-HillCompanies,Inc.,200115-8Irwin/McGraw-HillWeightedAverageCostofCapitalwithouttaxes(traditionalview)rDVrDrEIncludesBankruptcyRiskWACC©TheMcGraw-HillCompanies,Inc.,200115-9Irwin/McGraw-HillWeightedAverageCostofCapitalwithouttaxes(M&Mview)rDVrDrEIncludesBankruptcyRiskWACC©TheMcGraw-HillCompanies,Inc.,200115-10Irwin/McGraw-HillFinancialRisk-Risktoshareholdersresultingfromtheuseofdebt.FinancialLeverage-Increaseinthevariabilityofshareholderreturnsthatcomesfromtheuseofdebt.InterestTaxShield-Taxsavingsresultingfromdeductibilityofinterestpayments.C.S.&CorporateTaxes©TheMcGraw-HillCompanies,Inc.,200115-11Irwin/McGraw-HillExample-YouownalltheequityofSpaceBabiesDiaperCo..Thecompanyhasnodebt.Thecompany’sannualcashflowis$1,000,beforeinterestandtaxes.Thecorporatetaxrateis40%.Youhavetheoptiontoexchange1/2ofyourequitypositionfor10%bondswithafacevalueof$1,000.Shouldyoudothisandwhy?C.S.&CorporateTaxes©TheMcGraw-HillCompanies,Inc.,200115-12Irwin/McGraw-HillC.S.&CorporateTaxesAllEquity1/2DebtEBIT1,0001,000InterestPmt0100PretaxIncome1,000900Taxes@40%400360NetCashFlow$600$540TotalCashFlowAllEquity=600*1/2Debt=640(540+100)Example-YouownalltheequityofSpaceBabiesDiaperCo..Thecompanyhasnodebt.Thecompany’sannualcashflowis$1,000,beforeinterestandtaxes.Thecorporatetaxrateis40%.Youhavetheoptiontoexchange1/2ofyourequitypositionfor10%bondswithafacevalueof$1,000.Shouldyoudothisandwhy?©TheMcGraw-HillCompanies,Inc.,200115-13Irwin/McGraw-HillCapitalStructurePVofTaxShield=(assumeperpetuity)DxrDxTcrD=DxTcExample:Taxbenefit=1000x(.10)x(.40)=$40PVof40perpetuity=40/.10=$400PVTaxShield=DxTc=1000x.4=$400©TheMcGraw-HillCompanies,Inc.,200115-14Irwin/McGraw-HillCapitalStructureFirmValue=ValueofAllEquityFirm+PVTaxShieldExampleAllEquityValue=600/.10=6,000PVTaxShield=400FirmValuewith1/2Debt=$6,400©TheMcGraw-HillCompanies,Inc.,200115-15Irwin/McGraw-HillFinancialDistressCostsofFinancialDistress-Costsarisingfrombankruptcyordistortedbusinessdecisionsbeforebankruptcy.MarketValue=ValueifallEquityFinanced+PVTaxShield-PVCostsofFinancialDistress©TheMcGraw-HillCompanies,Inc.,200115-16Irwin/McGraw-HillFinancialDistressDebtMarketValueofTheFirmValueofunleveredfirmPVofinteresttaxshieldsCostsoffinancialdistressValueofleveredfirmOptimalamountofdebtMaximumvalueoffirm©TheMcGraw-HillCompanies,Inc.,200115-17Irwin/McGraw-HillFinancialChoicesTrade-offTheory-Theorythatcapitalstructureisbasedonatrade-offbetweentaxsavingsanddistresscostsofdebt.PeckingOrderTheory-Theorystatingthatfirmsprefertoissuedebtratherthanequityifinternalfinanceisinsufficient.