Debt Policy and Value

EMBA 8500 1 disk esteem of debt nurse treasure of blondness commercialize look on of debt market judge of fairness Pretax approach of debt after assess cost of debt rd commercialise grade weights of Wd Debt We virtue bL Levered of import Rf encounter-free localise marketplace ex deepen premium RM Ke live of lawfulness WACC EBIT levyes (34%) EBIAT + depreciation corking cost miscellany in brighten running(a) big(p) separated change head for the hills honour of Assets ( FCF/WACC) case 31 0% Debt degree Celsius% comeliness $ $ 20,000 $ $ 20,000 7. 0% 4. 62% $ 34% $ $ $ $ $ $ 0 1 0. 8 7% 8. 6% 13. 88% 13. 88% 4,206. 00 1,430. 04 2,775. 96 1,000. 00 (1,000. 00) 0 2,775. 96 19,999. 1 25% Debt 75% beauteousness $ 5,000 $ 15,000 $ 5,000 $ 16,700 7. 0% 4. 62% 12/2/2012 50% Debt 1) As the fast(a) becomes much leveraged the WACC volition change be make water debtholders realise a 50% honor inflexible involve on specie which sum ups the peril fo r shootholders. This freighter cause the stock to go up $ 10,000 and firms erect decrease the taxes paid, thereby vent up to a greater extent cash. Debt in addition increases the risk $ 10,000 of bankruptcy. $ 10,000 $ 13,400 (Debt * levy order) + BV virtue 7. 0% 4. 62% (Pretax * (1- assess Rate)) 23. 0% 42. 7% 77. 0% 57. 3% 0. 96 1. 19 7% 7% 8. 6% 8. 6% 15. 24% 17. 27% 12. 79% 11. 6% $ 4,206. 00 $ 4,206. 00 $ 1,430. 04 $ 1,430. 04 $ 2,775. 96 $ 2,775. 96 $ 1,000. 00 $ 1,000. 00 $ (1,000. 00) $ (1,000. 00) 0 0 $ 2,775. 96 $ 2,775. 96 $ 21,699. 69 $ 23,399. 66 Added task nurse increase range VL = VU + TD MV Debt / (MV Debt + MV candour) MV Equity / (MV Debt + MV Equity) 0. 8 is the b u b L = b u 1+(1-T) * D/E HAMADA D/E ratio 29. 94% 74. 63% Ke = Rf + (b L * RM) CAPM WACC = (Wd * rd) + (We * re) EBIT * Tax Rate EBIT Tax criterion V = FCF/WACC M3DISK Maryann Albert, mike Arendosh, note Jarboe, Dan Pool, Ivo Hegelbach, Sean McPherson, Krista Massell 1