Case thirty-one an Introduction to Debt Worth

Case 31 Introduction to Debt policy and value|

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1| | |

| 0% Dept| 25% Dept| 50 percent Dept

| 100% Equity| 75% Equity| 50% Value

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Book benefit of debt| 0. 00 | a couple of, 500. 00 | 5, 000. 00

Book value of equity| 12, 000. 00 | six, 500. 00 | your five, 000. 00 | The true market value of debt| 0. 00 | 2, 500. 00 | a few, 000. 00

Their market value of equity| 10, 1000. 00 | 8, 350. 00 | 6, seven hundred. 00 | Pretax expense of debt| 5%| 5%| 5%

After-tax expense of debt| 3. 3%| a few. 3%| several. 3%

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Their market value weight of: | | |

Debt| zero. 00 | 0. twenty | 0. 40

Equity| 1 ) 00 | 0. 70 | zero. 60

Levered beta| 0. 85 | 0. 96 | 1 . nineteen

Risk-free rate| 5%| 5%| 5%

Market premium| 6%| 6%| 6%

Cost of equity| on the lookout for. 8%| 12. 7%| doze. 2%

WACC| 9. 8%| 9. 0%| 8. 4%

EBIT| you, 485. 00 | 1, 485. 00 | you, 485. 00

Taxes 34%| 504. 90 | 504. 90 | 504. 90

EBIAT| 980. 10 | 980. 12 | 980. 10

Depreciation| 500. 00 | 500. 00 | 500. 00

Capital expense| (500. 00)| (500. 00)| (500. 00)

Change in net working capital| 0. 00 | 0. 00 | 0. 00

(Free cash flow)FCF| 980. 12 | 980. 10 | 980. 10

Value of Resources (FCF/WACC)| 10, 001. 02 | twelve, 851. eleven | 14, 701. nineteen | | | |

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2| | |

| 0% Dept| 25% Dept| 50% Dept

| 100% Equity| 73% Equity| 50% Equity

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Cash flow to creditors| | |

Interest| 0. 00 | 125. 00 | 250. 00

Pretax cost of debt| 5%| 5%| 5%

Value of debt| | |

(interest/Kd)| 0. 00 | 2, 500. 00 | five, 000. 00

Cashflow to shareholders| | |

EBIT| 1, 325. 00 | 1, 485. 00 | 1, 485. 00

Interest| 0. 00 | (125. 00)| (250. 00)

Pretax profit| 1, 325. 00 | 1, 360. 00 | 1, 235. 00

Taxes| 504. 90 | 462. forty five | 419. 90

Net income| 980. twelve | 897. 60 | 815. 15

Depreciation| 500. 00 | five-hundred. 00 | 500. 00

Capital expense| (500. 00)| (500. 00)| (500. 00)

Change in net functioning capital| zero. 00 | 0. 00 | 0. 00

Debt amortization| 0. 00 |...