In finance, as in accounting, the two sides of the balance sheet must be equal. we valued the asset side of the balance sheet. To value the other side, we must value the debt and the equity, and then add them together. as the firm levers up, how does the increase in value get apportioned between creditors and shareholders? Explain it 0% Debt/ 25% Debt/ 50% Debt/ 100% Equity 75% Equity 50% Equity Cash flow to creditors: Interest - $125 $250 Pretax cost of debt 5.0% 5.0% 5.0% Value of debt: (Int/Kd) Cash flow to shareholders: EBIT $1,485 $1,485 $1,485 Interest - $125 $250 Pretax profit Taxes (@ 34%) Net income + Depreciation $500 $500 $500 - Capital exp. ($500) ($500) ($500) + Change in net working capital - - - - Debt amortization - - - Residual cash flow Cost of equity Value of equity (RCF/Ke) Value of equity plus value of debt
In finance, as in accounting, the two sides of the balance sheet must be equal. we valued the asset side of the balance sheet. To value the other side, we must value the debt and the equity, and then add them together. as the firm levers up, how does the increase in value get apportioned between creditors and shareholders? Explain it 0% Debt/ 25% Debt/ 50% Debt/ 100% Equity 75% Equity 50% Equity Cash flow to creditors: Interest - $125 $250 Pretax cost of debt 5.0% 5.0% 5.0% Value of debt: (Int/Kd) Cash flow to shareholders: EBIT $1,485 $1,485 $1,485 Interest - $125 $250 Pretax profit Taxes (@ 34%) Net income + Depreciation $500 $500 $500 - Capital exp. ($500) ($500) ($500) + Change in net working capital - - - - Debt amortization - - - Residual cash flow Cost of equity Value of equity (RCF/Ke) Value of equity plus value of debt
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
Problem 8P
Related questions
Question
In finance, as in accounting, the two sides of the
0% Debt/ | 25% Debt/ | 50% Debt/ | |
100% Equity | 75% Equity | 50% Equity | |
Interest | - | $125 | $250 |
Pretax cost of debt | 5.0% | 5.0% | 5.0% |
Value of debt: | |||
(Int/Kd) | |||
Cash flow to shareholders: | |||
EBIT | $1,485 | $1,485 | $1,485 |
Interest | - | $125 | $250 |
Pretax profit | |||
Taxes (@ 34%) | |||
Net income | |||
+ |
$500 | $500 | $500 |
- Capital exp. | ($500) | ($500) | ($500) |
+ Change in net |
- | - | - |
- Debt amortization | - | - | - |
Residual cash flow | |||
Value of equity (RCF/Ke) | |||
Value of equity plus value of debt |
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 6 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT