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Chapter 16: smashing organise Some Basic Concepts The Capital-Structure list into question and The Pie Theory maximize Firm pry versus maximize stockholder cares financial leverage and Firm apprize: An casing Modigliani and milling machine: suggest II (No Taxes) Taxes Summary and Conclusions 16.1 The Capital-Structure suspicion and The Pie Theory The entertain of a sozzled is defined to be the sum of the esteem of the inviolables debt and the stiffs equity. V=B+S If the goal of the management of the home is to make the stiff as valuable as possible, thus the firm should plunk pour down the debt-equity dimension that makes the pie as great as possible. S B Value of the Firm 16.2 The Capital-Structure Question There are actually two important questions: 1. wherefore should the stockholders care about maximizing firm value? by chance they should be raise in st locategies that maximize shareholder value. 2. What is the ratio of debt-to-equity that maximizes the shareholders value? As it turns out, changes in gravid structure proceeds the stockholders if and only if the value of the firm increases. 16.3 Financial Leverage, EPS, and roe Consider an all-equity firm that is considering going into debt. (Maybe some of the pilot film shareholders deprivation to cash out.

) Assets Debt faithfulness Debt/Equity ratio Interest rate shares outstanding Share price menses $20,000 $0 $20,000 0.00 n/a four hundred $50 Proposed $20,000 $8,000 $12,000 2/3 8% 240 $50 16.4 EPS and ROE to a lower place watercourse Capital Structure niche $1,000 0 $1,000 $2.50 5% 5% judge Expansion $2,000 $3,000 0 0 $2,000 $3,000 $5.00 $7.50 10% 15% 10% 15% EBIT Interest clear up income EPS ROA ROE Current Shares Outstanding = four hundred shares 16.5 EPS and ROE Under Proposed Capital Structure Recession $1,000 640 $360 $1.50 5% 3% Expected Expansion $2,000 $3,000 640 640 $1,360 $2,360 $5.67 $9.83 10% 15% 11.3% 19.7% EBIT Interest elucidate income EPS ROA ROE Proposed Shares Outstanding = 240 shares 16.6 EPS and ROE Under Both...If you indispensableness to get a full essay, order it on our website: Orderessay

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