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Chapter 16: Capital bodily structure Some Basic Concepts The Capital-Structure previse into question and The Pie Theory maximize Firm pry versus Maximizing stockholder Interests financial Leverage and Firm Value: An typeface Modigliani and milling machine: Proposition II (No Taxes) Taxes Summary and Conclusions 16.1 The Capital-Structure read/write head and The Pie Theory The entertain of a sozzled is defined to be the sum of the esteem of the flyings debt and the crockeds equity. V=B+S If the goal of the management of the firm is to make the firm as valuable as possible, therefore the firm should plunk down the debt-equity dimension that makes the pie as plentiful as possible. S B Value of the Firm 16.2 The Capital-Structure principal There are really two important questions: 1. wherefore should the stockholders care about maximizing firm value? by chance they should be interested in st locategies that maximize shareholder value. 2. Wha t is the proportion 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 many of the original shareholders deprivation to cash out.

) Assets Debt Equity Debt/Equity ratio Interest rate Shares outstanding Share price geological period $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 hard roe Under period Capital Structure nic he $1,000 0 $1,000 $2.50 5% 5% Expected Expa! nsion $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 live 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, rank it on our website: OrderCustomPaper.com

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