台湾大学：《财务管理》（英文版） Chapter 15 The Capital Structure Decision

Fundamentals of Corporate Finance Third edition Chapter 15 The Capital Brealey Myers Marcus Structure Decision ndamentals of Corporate Finan Brealey Myers Marcus slides by Matthew will IrwinMcGraw-Hill CThe McGraw-Hill Companies, Inc, 2001

©The McGraw-Hill Companies, Inc.,2001 15- 1 Irwin/McGraw-Hill Chapter 15 Fundamentals of Corporate Finance Third Edition The Capital Structure Decision Brealey Myers Marcus slides by Matthew Will Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc.,2001

15-2 Topics Covered O Debt and Value in a Tax Free Economy CApital Structure and Corporate Taxes SCost of financial distress EXplaining financial choices Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001

©The McGraw-Hill Companies, Inc.,2001 15- 2 Irwin/McGraw-Hill Topics Covered Debt and Value in a Tax Free Economy Capital Structure and Corporate Taxes Cost of Financial Distress Explaining Financial Choices

15-3 M&M(debt Policy Doesnt Matter) MOdigliani miller When there are no taxes and capital markets function well. it makes no difference whether the firm borrows or individual shareholders borrow. Therefore the market value of a company does not depend on its capital structure Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001

©The McGraw-Hill Companies, Inc.,2001 15- 3 Irwin/McGraw-Hill M&M (Debt Policy Doesn’t Matter) Modigliani & Miller ➔When there are no taxes and capital markets function well, it makes no difference whether the firm borrows or individual shareholders borrow. Therefore, the market value of a company does not depend on its capital structure

15-4 M&M(debt Policy Doesnt Matter) Assumptions O By issuing 1 security rather than 2,company diminishes investor choice. This does not reduce value if Investors do not need choice OR There are sufficient alternative securities S Capital structure does not affect cash flows e.g → No taxes → no bankruptcy costs )No effect on management incentives Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001

©The McGraw-Hill Companies, Inc.,2001 15- 4 Irwin/McGraw-Hill M&M (Debt Policy Doesn’t Matter) Assumptions By issuing 1 security rather than 2, company diminishes investor choice. This does not reduce value if: ➔ Investors do not need choice, OR ➔ There are sufficient alternative securities Capital structure does not affect cash flows e.g... ➔No taxes ➔No bankruptcy costs ➔No effect on management incentives

15-5 M&M (Debt Policy Doesnt Matter) Example- River Cruises- All Equity financed Data Number of shares 100000 Price per share $10 m="""〓〓〓〓〓 Market Value of Shares S 1 million Outcome State of the economy Slump Expected Boom Operating Income $75,000125000175,000 Earnings per share $ 75 1.25 175 Return on shares 7.5 12.5% 17.5 Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001

©The McGraw-Hill Companies, Inc.,2001 15- 5 Irwin/McGraw-Hill Example - River Cruises - All Equity Financed Return on shares 7.5% 12.5% 17.5% Earnings per share $.75 1.25 1.75 Operating Income $75,000 125,000 175,000 Slump Expected Boom Outcome State of the Economy Market Value of Shares $1million Price per share $10 Number of shares 100,000 Data M&M (Debt Policy Doesn’t Matter)

15-6 M&M (Debt Policy Doesnt Matter) Example Data Number of shares 50.000 cont Price per share $10 吧吗 50%debt Market Value of Shares $500.000 Market val ue of debt $500.000 Outcome State of the economy Slump Expected Boom Operating Income $75,000125,000175,000 nterest $50.00050.00050,000 Equity earnings $25,00075,000125,000 Earnings pe er share $.501.50 2.50 Return on shares 5% l5% 25% Irwin/McGraw-Hill CThe McGraw-Hill Companies, Inc, 2001

©The McGraw-Hill Companies, Inc.,2001 15- 6 Irwin/McGraw-Hill Example cont. 50% debt Returnon shares 5% 15% 25% Earnings per share $.50 1.50 2.50 Equity earnings $25,000 75,000 125,000 Interest $50,000 50,000 50,000 Operating Income $75,000 125,000 175,000 Slump Expected Boom Outcome State of the Economy Market val ue of debt $ 500,000 Market Value of Shares $ 500,000 Price per share $10 Number of shares 50,000 Data M&M (Debt Policy Doesn’t Matter)

15-7 M&M (Debt Policy Doesnt Matter) Example- River Cruises- All Equity Financed Debt replicated by investors Outcome State of the economy Slump Expected Boom Earnings on two shares $1.502.50 3.50 LESS: Interest @10% $1001.00 1.00 Net earnings on investment $.501.50 2.50 Return on S10 investment 5% 15 25 Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001

©The McGraw-Hill Companies, Inc.,2001 15- 7 Irwin/McGraw-Hill Example - River Cruises - All Equity Financed - Debt replicated by investors Returnon $10 investment 5% 15% 25% Net earnings on investment $.50 1.50 2.50 LESS :Interest @10% $1.00 1.00 1.00 Earnings on two shares $1.50 2.50 3.50 Slump Expected Boom Outcome State of the Economy M&M (Debt Policy Doesn’t Matter)

c Weighted Average Cost of Capital without taxes(traditional view) E WACC mashin includes Bankruptcy Risk eftciftetaw-Hill Companies, Inc, 2001

©The McGraw-Hill Companies, Inc.,2001 15- 8 Irwin/McGraw-Hill Weighted Average Cost of Capital without taxes (traditional view) r D V rD rE Includes Bankruptcy Risk WACC

e Weighted Average Cost of Capital without taxes(M&M view) E WACC mashin includes Bankruptcy Risk eftciftetaw-Hill Companies, Inc, 2001

©The McGraw-Hill Companies, Inc.,2001 15- 9 Irwin/McGraw-Hill Weighted Average Cost of Capital without taxes (M&M view) r D V rD rE Includes Bankruptcy Risk WACC

5-10 C.S. Corporate Taxes Financial Risk -Risk to shareholders resulting from the use of debt Financial Leverage- Increase in the variability of shareholder returns that comes from the use of debt Interest Tax Shield- Tax savings resulting from deductibility of interest payments Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001

©The McGraw-Hill Companies, Inc.,2001 15- 10 Irwin/McGraw-Hill Financial Risk - Risk to shareholders resulting from the use of debt. Financial Leverage - Increase in the variability of shareholder returns that comes from the use of debt. Interest Tax Shield- Tax savings resulting from deductibility of interest payments. C.S. & Corporate Taxes