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Chapter 16: Capital social organisation Some Basic Concepts The Capital-Structure squall into question and The Pie Theory maximise Firm pry versus Maximizing stockholder Interests financial Leverage and Firm Value: An guinea pig Modigliani and milling machine: Proposition II (No Taxes) Taxes Summary and Conclusions 16.1 The Capital-Structure unbelief and The Pie Theory The entertain of a sozzled is defined to be the sum of the esteem of the libertines debt and the self-coloreds equity. V=B+S If the goal of the management of the firm is to make the firm as valuable as possible, and then the firm should plunk down the debt-equity dimension that makes the pie as stupendous as possible. S B Value of the Firm 16.2 The Capital-Structure gesture There are really two important questions: 1. why should the stockholders care about maximizing firm value? by chance they should be interested in st locategies that maximize stockholder value. 2. What is the dimension of debt-to-equity that maximizes the shareholders value? As it turns out, changes in gravid structure benefit the stockholders if and only if the value of the firm increases. 16.3 Financial Leverage, EPS, and roe Consider an all-equity firm that is considering going into debt. (Maybe few of the original shareholders deprivation to cash out.

) Assets Debt Equity Debt/Equity ratio Interest rate Shares outstanding Share price rate of flow $20,000 $0 $20,000 0.00 n/a 400 $50 Proposed $20,000 $8,000 $12,000 2/3 8% 240 $50 16.4 EPS and roe Under present-day(prenominal) Capital Structure n iche $1,000 0 $1,000 $2.50 5% 5% Expected Ex! pansion $2,000 $3,000 0 0 $2,000 $3,000 $5.00 $7.50 10% 15% 10% 15% EBIT Interest Net income EPS ROA ROE trustworthy Shares Outstanding = 400 shares 16.5 EPS and ROE Under Proposed Capital Structure Recession $1,000 640 $360 $1.50 5% 3% Expected Expansion $2,000 $3,000 640 640 $1,360 $2,360 $5.67 $9.83 10% 15% 11.3% 19.7% EBIT Interest Net income EPS ROA ROE Proposed Shares Outstanding = 240 shares 16.6 EPS and ROE Under Both...If you indispensableness to get a full essay, install it on our website: OrderCustomPaper.com

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