公司理财精要chap013.pptVIP

Leverage and Capital Structure Chapter 13 Key Concepts and Skills Understand the effect of financial leverage on cash flows and cost of equity Understand the impact of taxes and bankruptcy on capital structure choice Understand the basic components of the bankruptcy process Chapter Outline The Capital Structure Question The Effect of Financial Leverage Capital Structure and the Cost of Equity Capital Corporate Taxes and Capital Structure Bankruptcy Costs Optimal Capital Structure Observed Capital Structures A Quick Look at the Bankruptcy Process Capital Restructuring We are going to look at how changes in capital structure affect the value of the firm, all else equal Capital restructuring involves changing the amount of leverage a firm has without changing the firm’s assets Increase leverage by issuing debt and repurchasing outstanding shares Decrease leverage by issuing new shares and retiring outstanding debt Choosing a Capital Structure What is the primary goal of financial managers? Maximize stockholder wealth We want to choose the capital structure that will maximize stockholder wealth We can maximize stockholder wealth by maximizing firm value or minimizing WACC The Effect of Leverage How does leverage affect the EPS and ROE of a firm? When we increase the amount of debt financing, we increase the fixed interest expense If we have a really good year, then we pay our fixed cost and we have more left over for our stockholders If we have a really bad year, we still have to pay our fixed costs and we have less left over for our stockholders Leverage amplifies the variation in both EPS and ROE Example: Financial Leverage, EPS and ROE We will ignore the effect of taxes at this stage What happens to EPS and ROE when we issue debt and buy back shares of stock? Example: Financial Leverage, EPS and ROE Variability in ROE Current: ROE ranges from 6.25% to 18.75% Proposed: ROE ranges from 2.50% to 27.50% Variability in EPS Current: EPS ranges from $1.25 to $3.75 Proposed: