Case 31 an Introduction to Debt Value

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Case 31 Introduction to Debt policy and value| |
| | | |
1| | | |
| 0% Dept| 25% Dept| 50% Dept|
| 100% Equity| 75% Equity| 50% Equity|
| | | |
Book value of debt| 0.00 | 2,500.00 | 5,000.00 |
Book value of equity| 10,000.00 | 7,500.00 | 5,000.00 | Market value of debt| 0.00 | 2,500.00 | 5,000.00 |
Market value of equity| 10,000.00 | 8,350.00 | 6,700.00 | Pretax cost of debt| 5%| 5%| 5%|
After-tax cost of debt| 3.3%| 3.3%| 3.3%|
| | | |
Market value weight of:| | | |
Debt| 0.00 | 0.20 | 0.40 |
Equity| 1.00 | 0.80 | 0.60 |
Levered beta| 0.80 | 0.96 | 1.19 |
Risk-free rate| 5%| 5%| 5%|
Market premium| 6%| 6%| 6%|
Cost of equity| 9.8%| 10.7%| 12.2%|
WACC| 9.8%| 9.0%| 8.4%|
EBIT| 1,485.00 | 1,485.00 | 1,485.00 |
Taxes 34%| 504.90 | 504.90 | 504.90 |
EBIAT| 980.10 | 980.10 | 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| 980.10 | 980.10 | 980.10 |
Value of Assets (FCF/WACC)| 10,001.02 | 10,851.11 | 11,701.19 | | | | |
| | | |
2| | | |
| 0% Dept| 25% Dept| 50% Dept|
| 100% Equity| 75% Equity| 50% Equity|
| | | |
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 | 5,000.00 |
Cash flow to shareholders| | | |
EBIT| 1,485.00 | 1,485.00 | 1,485.00 |
Interest| 0.00 | (125.00)| (250.00)|
Pretax profit| 1,485.00 | 1,360.00 | 1,235.00 |
Taxes| 504.90 | 462.40 | 419.90 |
Net income| 980.10 | 897.60 | 815.10 |
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 |
Debt amortization| 0.00 |...
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