公司税和债务政策回顾实用教案

1、Topics Covered Debt and Value in a Tax Free Economy Corporate Taxes and Debt Policy Cost of Financial Distress Explaining Financial Choices第1页/共60页第一页，共61页。M&M (Debt Policy Doesnt Matter) Modigliani & Miller When there are no taxes and capital markets function well, it makes no difference wh

2、ether the firm borrows or individual shareholders borrow. Therefore, the market value of a company does not depend on its capital structure.第2页/共60页第二页，共61页。M&M (Debt Policy Doesnt Matter)Assumptions By issuing 1 security rather than 2, company diminishes investor choice. This does not reduce va

3、lue if: Investors do not need choice, OR There are sufficient alternative securities Capital structure does not affect cash flows e.g. No taxes No bankruptcy costs No effect on management incentives第3页/共60页第三页，共61页。Example - River Cruises - All Equity FinancedDataNumber of shares100,000Price per sha

4、re$10Market Value of Shares$ 1 millionOutcome State of the EconomySlumpExpectedBoomOperating Income$75,000125,000175,000Earnings per share$.751.251.75Return on shares (%)7.5%12.517.5M&M (Debt Policy Doesnt Matter)第4页/共60页第四页，共61页。Example cont.50% debtDataNumber of shares50,000Price per share$10M

5、arket Value of Shares$ 500,000Market value of debt$ 500,000Outcome State of the EconomySlumpExpectedBoomOperating Income$75,000125,000175,000Interest$50,00050,00050,000Equity earnings$25,00075,000125,000Earnings per share$.501.502.50Return on shares (%)5%1525M&M (Debt Policy Doesnt Matter)第5页/共6

6、0页第五页，共61页。Example - River Cruises - All Equity Financed- Debt replicated by investorsOutcome State of the EconomySlumpExpectedBoomEarnings on two shares$1.502.503.50LESS: Interest 10%$1.001.001.00Net earnings on investment$.501.502.50Return on $10 investment (%)5%1525M&M (Debt Policy Doesnt Mat

7、ter)第6页/共60页第六页，共61页。Financial Risk - Risk to shareholders resulting from the use of debt.Financial Leverage - Increase in the variability of shareholder returns that comes from the use of debt.Interest Tax Shield- Tax savings resulting from deductibility of interest payments.C.S. & Corporate Ta

8、xes第7页/共60页第七页，共61页。Example - You own all the equity of Space Babies Diaper Co. The company has no debt. The companys annual cash flow is $1,000, before interest and taxes. The corporate tax rate is 40%. You have the option to exchange 1/2 of your equity position for 10% bonds with a face value of $

9、1,000. Should you do this and why?C.S. & Corporate Taxes第8页/共60页第八页，共61页。Example - You own all the equity of Space Babies Diaper Co. The company has no debt. The companys annual cash flow is $1,000, before interest and taxes. The corporate tax rate is 40%. You have the option to exchange 1/2 of

10、your equity position for 10% bonds with a face value of $1,000. Should you do this and why? All Equity1/2 DebtEBIT1,000Interest Pmt 0 Pretax Income1,000Taxes 40% 400Net Cash Flow$600C.S. & Corporate Taxes第9页/共60页第九页，共61页。 All Equity1/2 DebtEBIT1,0001,000Interest Pmt 0 100 Pretax Income1,000 900T

11、axes 40% 400 360Net Cash Flow$600$540Example - You own all the equity of Space Babies Diaper Co. The company has no debt. The companys annual cash flow is $1,000, before interest and taxes. The corporate tax rate is 40%. You have the option to exchange 1/2 of your equity position for 10% bonds with

12、a face value of $1,000. Should you do this and why?C.S. & Corporate Taxes第10页/共60页第十页，共61页。C.S. & Corporate Taxes All Equity 1/2 DebtEBIT1,0001,000Interest Pmt 0 100 Pretax Income1,000 900Taxes 40% 400 360Net Cash Flow$600$540Total Cash Flow All Equity = 600 (540 + 100)Example - You own all

13、the equity of Space Babies Diaper Co. The company has no debt. The companys annual cash flow is $1,000, before interest and taxes. The corporate tax rate is 40%. You have the option to exchange 1/2 of your equity position for 10% bonds with a face value of $1,000. Should you do this and why?第11页/共60

14、页第十一页，共61页。Capital StructurePV of Tax Shield = (assume perpetuity) D x rD x Tc rD= D x Tc第12页/共60页第十二页，共61页。Capital StructurePV of Tax Shield = (assume perpetuity) D x rD x Tc rD= D x TcExample:Tax benefit = 1000 x (.10) x (.40) = $40 第13页/共60页第十三页，共61页。Capital StructurePV of Tax Shield = (assume pe

15、rpetuity) D x rD x Tc rD= D x TcExample:Tax benefit = 1000 x (.10) x (.40) = $40 PV of 40 perpetuity = 40 / .10 = $400第14页/共60页第十四页，共61页。Capital StructurePV of Tax Shield = (assume perpetuity) D x rD x Tc rD= D x TcExample:Tax benefit = 1000 x (.10) x (.40) = $40 PV of 40 perpetuity = 40 / .10 = $40

16、0PV Tax Shield = D x Tc = 1000 x .4 = $400第15页/共60页第十五页，共61页。Capital StructureFirm Value = Value of All Equity Firm + PV Tax Shield第16页/共60页第十六页，共61页。Capital StructureFirm Value = Value of All Equity Firm + PV Tax ShieldExampleAll Equity Value = 600 / .10 = 6,000 第17页/共60页第十七页，共61页。Capital Structure

17、Firm Value = Value of All Equity Firm + PV Tax ShieldExampleAll Equity Value = 600 / .10 = 6,000 PV Tax Shield = 400第18页/共60页第十八页，共61页。Capital StructureFirm Value = Value of All Equity Firm + PV Tax ShieldExampleAll Equity Value = 600 / .10 = 6,000 PV Tax Shield = 400Firm Value with 1/2 Debt = $6,40

18、0第19页/共60页第十九页，共61页。C.S. & Taxes (Personal & Corp)Relative Advantage Formula ( Debt vs Equity )1-TP(1-TPE) (1-TC)第20页/共60页第二十页，共61页。C.S. & Taxes (Personal & Corp)Relative Advantage Formula ( Debt vs Equity )1-TP(1-TPE) (1-TC)RAF 1 DebtRAF ADR = r (1 - Tc L ) L = Debt / Valuer = Cost

19、of equity all equityTc = Corp Tax Ratealternative to WACC (almost same results) Investment & FinancingInteraction第43页/共60页第四十三页，共61页。Adjusted Cost of Capital(alternative to WACC)Investment & FinancingInteractionMiles and Ezzell第44页/共60页第四十四页，共61页。Adjusted Present ValueAdjusted Discount RateW

20、eighted Average Cost of CapitalInvestment & FinancingInteraction第45页/共60页第四十五页，共61页。After Tax WACC The tax benefit from interest expense deductibility must be included in the cost of funds. This tax benefit reduces the effective cost of debt by a factor of the marginal tax rate. Old Formula第46页/

21、共60页第四十六页，共61页。After Tax WACCEDrVErVDTcWACC)1 (Tax Adjusted Formula第47页/共60页第四十七页，共61页。After Tax WACCExample - Sangria CorporationThe firm has a marginal tax rate of 35%. The cost of equity is 14.6% and the pretax cost of debt is 8%. Given the book and market value balance sheets, what is the tax ad

22、justed WACC?第48页/共60页第四十八页，共61页。After Tax WACCExample - Sangria Corporation - continued第49页/共60页第四十九页，共61页。After Tax WACCExample - Sangria Corporation - continuedMARKET VALUES第50页/共60页第五十页，共61页。After Tax WACCExample - Sangria Corporation - continuedDebt ratio = (D/V) = 50/125 = .4 or 40%Equity ratio

23、 = (E/V) = 75/125 = .6 or 60%EDrVErVDTcWACC)1 (第51页/共60页第五十一页，共61页。After Tax WACCExample - Sangria Corporation - continuedEDrVErVDTcWACC)1 (%84.101084.146.1257508.12550)35.1 (WACC第52页/共60页第五十二页，共61页。After Tax WACCExample - Sangria Corporation - continuedThe company would like to invest in a perpetua

24、l crushing machine with cash flows of $2.085 million per year pre-tax. Given an initial investment of $12.5 million, what is the value of the machine?第53页/共60页第五十三页，共61页。After Tax WACCExample - Sangria Corporation - continuedThe company would like to invest in a perpetual crushing machine with cash

25、flows of $2.085 million per year pre-tax. Given an initial investment of $12.5 million, what is the value of the machine?第54页/共60页第五十四页，共61页。After Tax WACCExample - Sangria Corporation - continuedThe company would like to invest in a perpetual crushing machine with cash flows of $2.085 million per y

26、ear pre-tax. Given an initial investment of $12.5 million, what is the value of the machine?REMEMBERCash Flow is BIAT=Before interest after taxes第55页/共60页第五十五页，共61页。After Tax WACC Preferred stock and other forms of financing must be included in the formula EPDrVErVPrVDTcWACC)1 (第56页/共60页第五十六页，共61页。After Tax WACCBalance Sheet (Market