Chapter 6 Flashcards
New MVe
= PAT / ke
Link between WACC and company value
Lower the WACC higher the value of the company as company value = future cash flowers discounted at WACC
Tax-exhaustion
where you run out of profits to deduct interest from
Thin capitalisation
When a business is funded by more debt than finance.
Interest will not be tax deductible above what could be raised from a bank in normal circumstances.
Using the traditional theory, a companies target capital structure is consistent with
Minimum weighted, average cost of capital
Modigliani and Miller theory with tax equation
Vg = Vu + TB
Vg - value of geared company
Vu - value of ungeared company
TB - value of tax shield
Calculating the cost of equity from two identical companies, one geared and one not geared
Keg = Keu + [Keu - Kd] x Vd [1-t]/Ve
Direct calculation of WACC from Keu
WACC = Keu ( 1 - [ Vdt / Ve + Vd])
When using percentages Vdt X Gearing
Modigliani and Miller text hypothesis
Which two statements are true
Capital structure influences the weighted average cost of capital and the value of the entity
Investors are in different between personal and corporate gearing
Cost of irredeemable debt
Coupon rate / market value X (1-T)
Calculation to use when there has been a change in the capital structure of business
M&M
Keg = Keu + [Keu - Kd] X ( Vd X [1-T]) / Ve
Formula to find caring from waiting average, cost of capital and cost of equity from an ungeared company
WACC = Keu (1- tL) where L = D/D+E
