Capital Structure

Question 1

MM Prop I, No Taxes

Answer 1

VL = VU

Market value of a company is not affected by the capital structure of the company.

Question 2

MM Prop I, Taxes

Answer 2

VL = VU + tax*D

value of levered firm is the value of the unlevered firm plus the value of the tax shield.

Question 3

MM Prop II, No Taxes

Answer 3

re = r0 + ( r0 - rd ) * (D/E)

Question 4

MM Prop II, Taxes

Answer 4

re = r0 + ( r0 - rd ) * (1-tax) * (D/E)

Question 5

Asset Beta

Answer 5

B_asset = (D/V) * B_d + (E/V) * B_e

Systematic risk of the assets of a company is a weighted average of the systematic risk of the debt and equity.

Question 6

Calculating B_e

Answer 6

B_e = B_a + (B_a - B_d) * (D/E)

Question 7

V_U

Answer 7

V_U = EBIT (1-t) / WACC

Question 8

General Formula for Value of Leveraged Company

Answer 8

V_L = V_U + tD - PV(costs financial distress)