Corporate finance chapter 016 capital structure

Chapter 16: Capital Structure Objective To understand how a firm can create value through its capital structure decisions... Chapter 16 Contents• 16.1 Internal Verses External Financing

Chapter 16: Capital

Structure

Objective

To understand how a firm can create value through its capital structure

decisions

Chapter 16 Contents

• 16.1 Internal Verses External Financing

• 16.2 Equity Financing

• 16.3 Debt Financing

• 16.4 The Irrelevance of Capital Structure in a

Frictionless Environment

• 16.5 Creating Value Through Financing Decisions

• 16.6 Reducing Costs

• 16.7 Dealing with Conflicts of Interest

• 16.8 Creating New Opportunities for Stakeholders

Claimant Classes

Nodett Somdett

1 Creditors No Yes

2 Government Yes Yes

3 Shareholders Yes Yes

Leverage (Gearing)

Equations

34%

Tax_Rate

Tax_Rate

* Interest CF

Tax_Rate

* Interest Tax_Rate

* EBIT

Interest Tax_Rate)

-(1

* Interest)

-(EBIT

Interest Earnings

Net CF

Nodett Somdett





















Market Values of Claims

Creditors

Shareholders

Government

$0.0 million

$66.0 million

$34.0 million

$40.0 million

$39.6 million

$20.4 million

Stock Price and Leverage (Real Estate Project with High Bankruptcy Costs)

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

M&M Equations

firm the

of ue market val E

D

V

equity s

firm' the

of ue market val

E

debt s

firm' a

of ue market val

D

interest of

rate free

-risk the

r

leverage

ut equity w/o of

cost the

k

) (

























E D

D r

E D

E k

WACC

r

k E

D k

k

e e