Effect of leverage on creditors and share holders

Assignment Help Corporate Finance

Reference no: EM1316317

Effect of leverage on creditors and share holders.

In finance, as in accounting, the two sides of the balance sheet must be equal. In the previous problem, 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.

	0% Debt/ 100% Equity	25% Debt/75% Equity	50% Debt/50% Equity
Cash flow to creditors:
Interest	0	$125	$250
Pretax cost of debt	0.05	0.05	0.05
Value of debt:
(Interest/kd)	-	-	-
Cash flow to shareholders:
EBIT	$1,485	$1,485	$1,485
- Interest	0	$125	$250
Pretax profit	-	-	-
Taxes (@ 34%)	-	-	-
Net income	-	-	-
+ Depreciation	$500	$500	$500
- Capital Expense	$500	$500	$500
+ change in net working capital	0	0	0
- Debt amortization	0	0	0
Residual Cash Flow (RCF)	-	-	-
Cost of equity	-	-	-
Value of equity (RCF/ke)	-	-	-
Value of equity plus value of debt	-	-	-

As the firm levers up, how does the increase in value get apportioned between the creditors and the shareholders?

Reference no: EM1316317

Questions Cloud

Objective type questions on cash balances : Objective type questions on cash balances and there is a constant rate of cash disbursement and no cash receipts during the month

Plot the engel curve and graph indifference curve : Assume Helen's income increased from $30,000 per year to $45,000 per year and Helen\'s crab meat consumption went from 25 pounds per year to 30 pounds per year.

Evaluation of sum of values of pure business flows : Evaluation of Sum of values of pure business flows and financing effect - Financing flows should be discounted at the rate of return required by the providers of debt.

Compute the time and cost : Compute the time and cost

Effect of leverage on creditors and share holders : Effect of leverage on creditors and share holders - As the firm levers up, how does the increase in value get apportioned between the creditors and the shareholders?

Determine the indifference level of ebit : Compute the indifference level of EBIT - Determine the indifference level of EBIT between these two alternatives.

Population mean-sample sizes : What is the probability that a sample mean will be within plus-or-minus two of the population mean for each of the following sample sizes?

Who has visited an online auction site in the past month : Visits to Web sites. What kinds of Web sites do males aged 18 to 34 visit most often? Pornographic sites take first place, but about 50 percent of male Internet users in this age group visit an auction site such as eBay at least once a month. Inte..

An instructor claims the average time to take a statistics : An instructor claims the average time to take a statistics test is greater than 39 min. As, if a sample of 33 students took 43 min. is the instructor's claim true?

User Account

All Pages