Case 31 an Introduction to Debt Value

Case 31 Introduction to Debt policy and value | |
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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 |
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| | | |
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 |... [continues]

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