Effect of leverage on creditors and share holdersin finance

Assignment Help Corporate Finance

Reference no: EM13356965

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: EM13356965

Questions Cloud

Capital structure decisionsan understanding of the concepts : capital structure decisionsan understanding of the concepts of complete markets and spanning are essential for an

Effect of capital structure on companies value per : effect of capital structure on companies value per share.after-tax cash flows payback npv pi irr fabulous fashions is

Evaluation of various capital structure mixwhat remains to : evaluation of various capital structure mix.what remains to be seen however is whether shareholders are better or worse

Calculation of sum of values of pure business flows and : calculation of sum of values of pure business flows and financing effect.in the preceding problem we divided the value

Effect of leverage on creditors and share holdersin finance : effect of leverage on creditors and share holders.in finance as in accounting the two sides of the balance sheet must

Compute the indifference level of ebitmoon and chittenden : compute the indifference level of ebit.moon and chittenden are considering a new internet venture to sell used

Selection of optimal source of finance and calculating : selection of optimal source of finance and calculating times interest earned ratiomorton industries is considering

Selection of optimal source of financemorton industries is : selection of optimal source of finance.morton industries is considering opening a new subsidiary in boston to b

Calculate the expected eps fo both financing plansselection : calculate the expected eps fo both financing plans.selection of optimal source of finance.morton industries is

User Account

All Pages