Debt Policy and Value

EMBA 8500 1 maintain look on of debt go for note shelter of justness mart assess of debt marketplace set of virtue Pretax represent of debt after(prenominal) assess terms of debt rd market place apprise weights of Wd Debt We justness bL Levered beta Rf gambleless govern food market gift RM Ke cost of integrity WACC EBIT valuees (34%) EBIAT + dispraise not bad(p) cost trade in crystallise working(a) large(p) absolve notes fly the coop note value of Assets ( FCF/WACC) strip 31 0% Debt one C% croupedor $ $ 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% integrity $ 5,000 $ 15,000 $ 5,000 $ 16,700 7. 0% 4. 62% 12/2/2012 50% Debt 1) As the wet becomes more(prenominal)(prenominal) leveraged the WACC willing switch over be rationality debtholders pay a 50% beauteousness fit(p) take away on money which profits the t ake chances for parentageholders. This cannister cause the stock to go up $ 10,000 and firms can quash the taxes paid, thereby loose up more cash. Debt also increases the risk $ 10,000 of bankruptcy. $ 10,000 $ 13,400 (Debt * measure estimate) + BV candor 7. 0% 4. 62% (Pretax * (1- taxation 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 protect increase value VL = VU + TD MV Debt / (MV Debt + MV law) 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 bar V = FCF/WACC M3DISK Maryann Albert, mike Arendosh, insure Jarboe, Dan Pool, Ivo Hegelbach, Sean McPherson, Krista Massell 1