公司金融课件 13.Capital Structure and Financial Leverage.docVIP

CAPITAL STRUCTURE AND FINANCIAL LEVERAGE Financial leverage and M M propositions I II Leverage and homemade leverage M M Propositions I II with corporate taxes A pecking order or signaling theory of capital structure FINANCIAL LEVERAGE No Corporate Tax M M Proposition I: The value of a firm is unaffected by its capital structure (the debt irrelevance proposition). M M Proposition II: A firm’s cost of equity capital is a positive linear function of its capital structure. Or, The required rate of return on equity increases as the firm’s debt-equity ratio increases. 1. A firm with no debt is called an unlevered company or an all-equity company. After the issuance of debt, it becomes levered. 2. RESTRUCTURING: The process of changing the firm’s capital structure without changing its assets. Example: p.391, 15.2 Ross Leverage can result in higher returns in good times and lower returns in bad time. Leverage increases risk, since the earnings per share available to the equity holders are more sensitive to the performance of the firm. HOMEMADE LEVERAGE: The use of personal borrowing to change the overall amount of financial leverage to which the individual is exposed. Return on equity( $2000=100shares) Recession Normal Expansion No debt 6.25% 12.5% 18.75% D/E = 1 2.5% 15.0% 27.5% $50 $300 $550 By homemade leverage: Borrow: $2000 at interest rate of 10% Buy shares: $4000 * $20 = 200 shares Cost: $2000 * 10% = $200 ROE: Recession = $50 (4000*6.25%=250 250-200=50) Normal = $300 (4000 * 12.5% = 500 500 – 200 = 300) Expansion=$550(4000* 18.75%=750 750 – 200 = 550) Risk and Cost of Equity While changing the capital structure under these conditions does not add value to the firm, it does