商业财务学英文版教学课件：Chap012 Capital Structure Basic Concepts

1、Capital Structure: Basic ConceptsChapter 12Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin14-1Describe and interpret the effect of financial leverage (i.e., capital structure) on firm earningsDefine and apply homemade leverageExplain capital structure theories

2、 with and without taxesCompute the value of the unlevered and levered firm14-212.1 The Capital Structure Question and The Pie Theory12.2 Maximizing Firm Value versus Maximizing Stockholder Interests12.3 Financial Leverage and Firm Value: An Example12.4 Modigliani and Miller: Proposition II (No Taxes

3、)12.5 Taxes14-3The value of a firm is defined to be the sum of the value of the firms debt and the firms equity.V = B + S If the goal of the firms management is to make the firm as valuable as possible, then the firm should pick the debt-equity ratio that makes the pie as big as possible. Value of t

4、he FirmS BS BS BS B14-4There are two important questions:1.Why should the stockholders care about maximizing firm value? Perhaps they should be interested in strategies that maximize shareholder value.2.What is the ratio of debt-to-equity that maximizes the shareholders value?As it turns out, change

5、s in capital structure benefit the stockholders if and only if the value of the firm increases.14-5CurrentAssets$20,000Debt$0Equity$20,000Debt/Equity ratio 0.00Interest raten/aShares outstanding400Share price$50Proposed$20,000$8,000$12,0002/38%240$50Consider an all-equity firm that is considering go

6、ing into debt. (Maybe some of the original shareholders want to cash out.)14-6RecessionExpected ExpansionEBIT$1,000$2,000$3,000Interest000Net income$1,000$2,000$3,000EPS$2.50$5.00$7.50ROA5%10%15%ROE5%10%15%Current Shares Outstanding = 400 shares14-7RecessionExpected ExpansionEBIT$1,000$2,000$3,000In

7、terest640640640Net income$360$1,360$2,360EPS$1.50$5.67$9.83ROA1.8%6.8%11.8%ROE3.0%11.3%19.7%Proposed Shares Outstanding = 240 shares14-8(2.00)0.002.004.006.008.0010.0012.001,0002,0003,000EPSDebtNo DebtBreak-even point EBIT in dollars, no taxesAdvantage to debtDisadvantage to debt14-9Homogeneous Expe

8、ctationsHomogeneous Business Risk ClassesPerpetual Cash FlowsPerfect Capital Markets: Perfect competition Firms and investors can borrow/lend at the same rate Equal access to all relevant information No transaction costs No taxes14-10Recession Expected ExpansionEPS of Unlevered Firm$2.50$5.00$7.50Ea

9、rnings for 40 shares$100$200$300Less interest on $800 (8%) $64$64$64Net Profits$36$136$236ROE (Net Profits / $1,200)3.0%11.3%19.7%We are buying 40 shares of a $50 stock, using $800 in margin. We get the same ROE as if we bought into a levered firm.Our personal debt-equity ratio is:32200, 1$800$SB14-

10、11RecessionExpected ExpansionEPS of Levered Firm $1.50$5.67$9.83Earnings for 24 shares$36$136$236Plus interest on $800 (8%)$64$64$64Net Profits$100$200$300ROE (Net Profits / $2,000)5%10%15%Buying 24 shares of an otherwise identical levered firm along with some of the firms debt gets us to the ROE of

11、 the unlevered firm.This is the fundamental insight of M&M14-12We can create a levered or unlevered position by adjusting the trading in our own account.This homemade leverage suggests that capital structure is irrelevant in determining the value of the firm:VL = VU14-13Proposition II Leverage i

12、ncreases the risk and return to stockholdersRs = R0 + (B / S) (R0 - RB)RB is the interest rate (cost of debt)RS is the return on (levered) equity (cost of equity)R0 is the return on unlevered equity (cost of capital)B is the value of debtS is the value of equity14-14The derivation is straightforward

13、:SBWACCRSBSRSBBR0set Then RRWACC0RRSBSRSBBSBSSBby sidesboth multiply 0RSSBRSBSSSBRSBBSSBSB0RSSBRRSBSB00RRSBRRSBSB)(00BSRRSBRR14-15Debt-to-equity RatioCost of capital: R (%)R0RBSBWACCRSBSRSBBR)(00BSRRSBRRRBSB14-16Proposition I (with Corporate Taxes) Firm value increases with leverageVL = VU + tC BPro

14、position II (with Corporate Taxes) Some of the increase in equity risk and return is offset by the interest tax shieldRS = R0 + (B/S)(1-tC)(R0 - RB) RB is the interest rate (cost of debt)RS is the return on equity (cost of equity)R0 is the return on unlevered equity (cost of capital)B is the value o

15、f debtS is the value of equity14-17BtVVCUL BRtBREBITBCB)1 ()(is rsstakeholde all toflowcash totalTheThe present value of this stream of cash flows is VL BRtBREBITBCB)1 ()(Clearly The present value of the first term is VU The present value of the second term is tCB BRtBRtEBITBCBC)1 ()1 (BRBtRBRtEBITB

16、CBBC)1 (14-18Start with M&M Proposition I with taxes:)()1 (00BCSRRtSBRRBtVVCUL Since BSVLThe cash flows from each side of the balance sheet must equal:BCUBSBRtRVBRSR0BRtRtBSBRSRBCCBS0)1 (Divide both sides by SBCCBSRtSBRtSBRSBR0)1 (1 BtVBSCU)1 (CUtBSVWhich quickly reduces to14-19Debt-to-equityrat

17、io (B/S)Cost of capital: R(%)R0RB)()1 (00BCSRRtSBRRSCBWACCRSBStRSBBR)1 ()(00BSRRSBRR14-20RecessionExpectedExpansionEBIT$1,000$2,000$3,000Interest ($800 8% )640640640EBT$360$1,360$2,360Taxes (tc = 35%)$126$476$826Total Cash Flow $234+640$884+$640$1,534+$640(to both S/H & B/H): $874$1,524$2,174EBI

18、T(1-tc)+tCRBB $650+$224$1,300+$224$1,950+$224$874$1,524$2,174RecessionExpectedExpansionEBIT$1,000$2,000$3,000Interest000EBT$1,000$2,000$3,000Taxes (tc = 35%)$350$700$1,050Total Cash Flow to S/H $650$1,300$1,950All EquityLevered14-21The levered firm pays less in taxes than does the all-equity firm.Th

19、us, the sum of the debt plus the equity of the levered firm is greater than the equity of the unlevered firm. This is how cutting the pie differently can make the pie “larger.” -the government takes a smaller slice of the pie!SGSGB All-equity firm Levered firm14-22In a world of no taxes, the value o

20、f the firm is unaffected by capital structure. This is M&M Proposition I:VL = VUProposition I holds because shareholders can achieve any pattern of payouts they desire with homemade leverage.In a world of no taxes, M&M Proposition II states that leverage increases the risk and return to stockho