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DebtPolicyDoesn’tMatter(英文版知识讲义)TopicsCoveredDebtandValueinaTaxFreeEconomyCorporateTaxesandDebtPolicyCostofFinancialDistressExplainingFinancialChoicesM&M(DebtPolicyDoesn’tMatter)Modigliani&MillerWhentherearenotaxesandcapitalmarketsfunctionwell,itmakesnodifferencewhetherthefirmborrowsorindividualshareholdersborrow.Therefore,themarketvalueofacompanydoesnotdependonitscapitalstructure.M&M(DebtPolicyDoesn’tMatter)AssumptionsByissuing1securityratherthan2,companydiminishesinvestorchoice.Thisdoesnotreducevalueif:Investorsdonotneedchoice,ORTherearesufficientalternativesecuritiesCapitalstructuredoesnotaffectcashflowse.g...NotaxesNobankruptcycostsNoeffectonmanagementincentivesExlecont.50%debtM&M(DebtPolicyDoesn’tMatter)Exle-RiverCruises-AllEquityFinanced -DebtreplicatedbyinvestorsM&M(DebtPolicyDoesn’tMatter)FinancialRisk-Risktoshareholdersresultingfromtheuseofdebt.FinancialLeverage-Increaseinthevariabilityofshareholderreturnsthatcomesfromtheuseofdebt.InterestTaxShield-Taxsavingsresultingfromdeductibilityofinterestpayments.C.S.&CorporateTaxesExle-YouownalltheequityofSpaceBabiesDiaperCo..Thecompanyhasnodebt.Thecompany’sannualcashflowis$1,000,beforeinterestandtaxes.Thecorporatetaxrateis40%.Youhavetheoptiontoexchange1/2ofyourequitypositionfor10%bondswithafacevalueof$1,000.Shouldyoudothisandwhy?C.S.&CorporateTaxes

AllEquity 1/2DebtEBIT 1,000 1,000InterestPmt 0 100PretaxIncome 1,000 900Taxes@40% 400 360NetCashFlow $600 $540Exle-YouownalltheequityofSpaceBabiesDiaperCo..Thecompanyhasnodebt.Thecompany’sannualcashflowis$1,000,beforeinterestandtaxes.Thecorporatetaxrateis40%.Youhavetheoptiontoexchange1/2ofyourequitypositionfor10%bondswithafacevalueof$1,000.Shouldyoudothisandwhy?C.S.&CorporateTaxesC.S.&CorporateTaxes

AllEquity 1/2DebtEBIT 1,000 1,000InterestPmt 0 100PretaxIncome 1,000 900Taxes@40% 400 360NetCashFlow $600 $540TotalCashFlowAllEquity=600*1/2Debt=640(540+100)Exle-YouownalltheequityofSpaceBabiesDiaperCo..Thecompanyhasnodebt.Thecompany’sannualcashflowis$1,000,beforeinterestandtaxes.Thecorporatetaxrateis40%.Youhavetheoptiontoexchange1/2ofyourequitypositionfor10%bondswithafacevalueof$1,000.Shouldyoudothisandwhy?CapitalStructurePVofTaxShield=(assumeperpetuity)

DxrDxTcrD=DxTcCapitalStructurePVofTaxShield=(assumeperpetuity)

DxrDxTcrD=DxTcExle:Taxbenefit=1000x(.10)x(.40)=$40

CapitalStructurePVofTaxShield=(assumeperpetuity)

DxrDxTcrD=DxTcExle:Taxbenefit=1000x(.10)x(.40)=$40PVof40perpetuity=40/.10=$400CapitalStructurePVofTaxShield=(assumeperpetuity)

DxrDxTcrD=DxTcExle:Taxbenefit=1000x(.10)x(.40)=$40PVof40perpetuity=40/.10=$400PVTaxShield=DxTc=1000x.4=$400CapitalStructureFirmValue=ValueofAllEquityFirm+PVTaxShieldExleAllEquityValue=600/.10=6,000

CapitalStructureFirmValue=ValueofAllEquityFirm+PVTaxShieldExleAllEquityValue=600/.10=6,000PVTaxShield=400CapitalStructureFirmValue=ValueofAllEquityFirm+PVTaxShieldExleAllEquityValue=600/.10=6,000PVTaxShield=400FirmValuewith1/2Debt=$6,400C.S.&Taxes(Personal&Corp)RelativeAdvantageFormula(DebtvsEquity)1-TP(1-TPE)(1-TC)C.S.&Taxes(Personal&Corp)RelativeAdvantageFormula(DebtvsEquity)1-TP(1-TPE)(1-TC)RAF>1 DebtRAF<1 EquityAdvantageExle1AllDebt AllEquityIncomeBTCP 1.00 lessTC=.46 0.00 IncomeBTP 1.00 TaxesTP=.5TPE=0 0.50 AfterTaxIncome 0.50 C.S.&Taxes(Personal&Corp)Exle1AllDebt AllEquityIncomeBTCP 1.00 1.00lessTC=.46 0.00 0.46IncomeBTP 1.00 0.54TaxesTP=.5TPE=0 0.50 0.00AfterTaxIncome 0.50 0.54RAF=.926AdvantageEquityC.S.&Taxes(Personal&Corp)Exle2AllDebt AllEquityIncomeBTCP 1.00 lessTC=.34 0.00 IncomeBTP 1.00 TaxesTP=.28TPE=.21 0.28 AfterTaxIncome 0.72 C.S.&Taxes(Personal&Corp)Exle2AllDebt AllEquityIncomeBTCP 1.00 1.00lessTC=.34 0.00 0.34IncomeBTP 1.00 0.66TaxesTP=.28TPE=.21 0.28 0.139AfterTaxIncome 0.72 0.521C.S.&Taxes(Personal&Corp)Exle2AllDebt AllEquityIncomeBTCP 1.00 1.00lessTC=.34 0.00 0.34IncomeBTP 1.00 0.66TaxesTP=.21TPE=.28 0.28 0.139AfterTaxIncome 0.72 0.521RAF=1.381AdvantageDebtC.S.&Taxes(Personal&Corp)Today’sRAF&DebtvsEquitypreference.OldTaxCode1-.28(1-.28)(1-.34)=1.52RAF=C.S.&Taxes(Personal&Corp)Today’sRAF&DebtvsEquitypreference.NewTaxCode1-.28(1-.20)(1-.34)=1.36RAF=C.S.&Taxes(Personal&Corp)CapitalStructureStructureofBondYieldRatesDEBondYieldrWeightedAverageCostofCapital

withouttaxes(traditionalview)rDVrDrEIncludesBankruptcyRiskWACCFinancialDistressCostsofFinancialDistress-Costsarisingfrombankruptcyordistortedbusinessdecisionsbeforebankruptcy.FinancialDistressCostsofFinancialDistress-Costsarisingfrombankruptcyordistortedbusinessdecisionsbeforebankruptcy.MarketValue= ValueifallEquityFinanced +PVTaxShield

-PVCostsofFinancialDistressFinancialDistressDebtMarketValueofTheFirmValueofunleveredfirmPVofinteresttaxshieldsCostsoffinancialdistressValueofleveredfirmOptimalamountofdebtMaximumvalueoffirmFinancialChoicesTrade-offTheory-Theorythatcapitalstructureisbasedonatrade-offbetweentaxsavingsanddistresscostsofdebt.PeckingOrderTheory-Theorystatingthatfirmsprefertoissuedebtratherthanequityifinternalfinanceisinsufficient.exle:ProjectAhasanNPVof$150,000.Inordertofinancetheprojectwemustissuestock,withabrokeragecostof$200,000.Investment&Financing

Interactionexle:ProjectAhasanNPVof$150,000.Inordertofinancetheprojectwemustissuestock,withabrokeragecostof$200,000.ProjectNPV= 150,000Stockissuecost= -200,000AdjustedNPV -50,000don’tdotheprojectInvestment&Financing

Interactionexle:ProjectBhasaNPVof-$20,000.Wecanissuedebtat8%tofinancetheproject.ThenewdebthasaPVTaxShieldof$60,000.AssumethatProjectBisyouronlyoption.Investment&Financing

Interactionexle:ProjectBhasaNPVof-$20,000.Wecanissuedebtat8%tofinancetheproject.ThenewdebthasaPVTaxShieldof$60,000.AssumethatProjectBisyouronlyoption.ProjectNPV= -20,000Stockissuecost= 60,000AdjustedNPV 40,000dotheprojectInvestment&Financing

InteractionAdjustedPresentValueAdjustedDiscountRateInvestment&Financing

InteractionAdjustedCostofCapital(alternativetoWACC)Investment&Financing

InteractionMilesandEzzellAdjustedPresentValueAdjustedDiscountRateWeightedAverageCostofCapitalInvestment&Financing

InteractionAfterTaxWACCThetaxbenefitfrominterestexpensedeductibilitymustbeincludedinthecostoffunds.Thistaxbenefitreducestheeffectivecostofdebtbyafactorofthemarginaltaxrate.OldFormulaAfterTaxWACCTaxAdjustedFormulaAfterTaxWACC Exle-SangriaCorporation Thefirmhasamarginaltaxrateof35%.Thecostofequityis14.6%andthepretaxcostofdebtis8%.Giventhebookandmarketvaluebalancesheets,whatisthetaxadjustedWACC?AfterTaxWACC Exle-SangriaCorporation-continuedAfterTaxWACC Exle-SangriaCor

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