公司税和债务政策回顾PPT课件

-,1,Review,PreMid-Term-Debtvs.EquityoverviewLastLecture(Ch17)reintroducedthesetopicsNow-Wewillbegintoaddrealworldcomplexities.,-,2,TopicsCovered,DebtandValueinaTaxFreeEconomyCorporateTaxesandDebtPolicyCostofFinancialDistressExplainingFinancialChoices,-,3,M&M(DebtPolicyDoesntMatter),Modigliani&MillerWhentherearenotaxesandcapitalmarketsfunctionwell,itmakesnodifferencewhetherthefirmborrowsorindividualshareholdersborrow.Therefore,themarketvalueofacompanydoesnotdependonitscapitalstructure.,-,4,M&M(DebtPolicyDoesntMatter),AssumptionsByissuing1securityratherthan2,companydiminishesinvestorchoice.Thisdoesnotreducevalueif:Investorsdonotneedchoice,ORTherearesufficientalternativesecuritiesCapitalstructuredoesnotaffectcashflowse.g.NotaxesNobankruptcycostsNoeffectonmanagementincentives,-,5,Example-RiverCruises-AllEquityFinanced,M&M(DebtPolicyDoesntMatter),-,6,Examplecont.50%debt,M&M(DebtPolicyDoesntMatter),-,7,Example-RiverCruises-AllEquityFinanced-Debtreplicatedbyinvestors,M&M(DebtPolicyDoesntMatter),-,8,FinancialRisk-Risktoshareholdersresultingfromtheuseofdebt.FinancialLeverage-Increaseinthevariabilityofshareholderreturnsthatcomesfromtheuseofdebt.InterestTaxShield-Taxsavingsresultingfromdeductibilityofinterestpayments.,C.S.&CorporateTaxes,-,9,Example-YouownalltheequityofSpaceBabiesDiaperCo.Thecompanyhasnodebt.Thecompanysannualcashflowis$1,000,beforeinterestandtaxes.Thecorporatetaxrateis40%.Youhavetheoptiontoexchange1/2ofyourequitypositionfor10%bondswithafacevalueof$1,000.Shouldyoudothisandwhy?,C.S.&CorporateTaxes,-,10,Example-YouownalltheequityofSpaceBabiesDiaperCo.Thecompanyhasnodebt.Thecompanysannualcashflowis$1,000,beforeinterestandtaxes.Thecorporatetaxrateis40%.Youhavetheoptiontoexchange1/2ofyourequitypositionfor10%bondswithafacevalueof$1,000.Shouldyoudothisandwhy?,AllEquity1/2DebtEBIT1,000InterestPmt0PretaxIncome1,000Taxes40%400NetCashFlow$600,C.S.&CorporateTaxes,-,11,AllEquity1/2DebtEBIT1,0001,000InterestPmt0100PretaxIncome1,000900Taxes40%400360NetCashFlow$600$540,Example-YouownalltheequityofSpaceBabiesDiaperCo.Thecompanyhasnodebt.Thecompanysannualcashflowis$1,000,beforeinterestandtaxes.Thecorporatetaxrateis40%.Youhavetheoptiontoexchange1/2ofyourequitypositionfor10%bondswithafacevalueof$1,000.Shouldyoudothisandwhy?,C.S.&CorporateTaxes,-,12,C.S.&CorporateTaxes,AllEquity1/2DebtEBIT1,0001,000InterestPmt0100PretaxIncome1,000900Taxes40%400360NetCashFlow$600$540,TotalCashFlowAllEquity=600*1/2Debt=640(540+100),Example-YouownalltheequityofSpaceBabiesDiaperCo.Thecompanyhasnodebt.Thecompanysannualcashflowis$1,000,beforeinterestandtaxes.Thecorporatetaxrateis40%.Youhavetheoptiontoexchange1/2ofyourequitypositionfor10%bondswithafacevalueof$1,000.Shouldyoudothisandwhy?,-,13,CapitalStructure,PVofTaxShield=(assumeperpetuity),DxrDxTcrD,=DxTc,-,14,CapitalStructure,PVofTaxShield=(assumeperpetuity),DxrDxTcrD,=DxTc,Example:Taxbenefit=1000 x(.10)x(.40)=$40,-,15,CapitalStructure,PVofTaxShield=(assumeperpetuity),DxrDxTcrD,=DxTc,Example:Taxbenefit=1000 x(.10)x(.40)=$40PVof40perpetuity=40/.10=$400,-,16,CapitalStructure,PVofTaxShield=(assumeperpetuity),DxrDxTcrD,=DxTc,Example:Taxbenefit=1000 x(.10)x(.40)=$40PVof40perpetuity=40/.10=$400PVTaxShield=DxTc=1000 x.4=$400,-,17,CapitalStructure,FirmValue=ValueofAllEquityFirm+PVTaxShield,-,18,CapitalStructure,FirmValue=ValueofAllEquityFirm+PVTaxShield,ExampleAllEquityValue=600/.10=6,000,-,19,CapitalStructure,FirmValue=ValueofAllEquityFirm+PVTaxShield,ExampleAllEquityValue=600/.10=6,000PVTaxShield=400,-,20,CapitalStructure,FirmValue=ValueofAllEquityFirm+PVTaxShield,ExampleAllEquityValue=600/.10=6,000PVTaxShield=400FirmValuewith1/2Debt=$6,400,-,21,C.S.&Taxes(Personal&Corp),RelativeAdvantageFormula(DebtvsEquity),1-TP,(1-TPE)(1-TC),-,22,C.S.&Taxes(Personal&Corp),RelativeAdvantageFormula(DebtvsEquity),1-TP,(1-TPE)(1-TC),RAF1DebtRAFADR=r(1-TcL)L=Debt/Valuer=CostofequityallequityTc=CorpTaxRatealternativetoWACC(almostsameresults),Investment&FinancingInteraction,-,45,AdjustedCostofCapital(alternativetoWACC),Investment&FinancingInteraction,MilesandEzzell,-,46,AdjustedPresentValueAdjustedDiscountRateWeightedAverageCostofCapital,Investment&FinancingInteraction,-,47,AfterTaxWACC,Thetaxbenefitfrominterestexpensedeductibilitymustbeincludedinthecostoffunds.Thistaxbenefitreducestheeffectivecostofdebtbyafactorofthemarginaltaxrate.,OldFormula,-,48,AfterTaxWACC,TaxAdjustedFormula,-,49,AfterTaxWACC,Example-SangriaCorporationThefirmhasamarginaltaxrateof35%.Thecostofequityis14.6%andthepretaxcostofdebtis8%.Giventhebookandmarketvaluebalancesheets,whatisthetaxadjustedWACC?,-,50,AfterTaxWACC,Example-SangriaCorporation-continued,-,51,AfterTaxWACC,Example-SangriaCorporation-continued,MARKETVALUES,-,52,AfterTaxWACC,Example-SangriaCorporation-continued,Debtratio=(D/V)=50/125=.4or40%Equityratio=(E/V)=75/125=.6or60%,-,53,AfterTaxWACC,Example-SangriaCorporation-continued,-,54,AfterTaxWACC,Example-SangriaCorporation-continuedThecompanywouldliketoinvestinaperpetualcrushingmachinewithcashflowsof$2.085millionperyearpre-tax.Givenaninitialinvestmentof$12.5million,whatisthevalueofthemachine?,-,55,AfterTaxWACC,Example-SangriaCorporation-continuedThecompanywouldliketoinvestinaperpetualcrushingmachinewithcashflowsof$2.085millionperyearpre-tax.Givenaninitialinvestmentof$12.5million,whatisthevalueofthemachine?,-,56,AfterTaxWACC,Example-SangriaCorporation-continuedThecompanywouldliketoinvestinaperpetualcrushingmachinewithcashflowsof$2.085millionperyearpre-tax.Givenaninitialinvestmentof$12.5