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how financialleverageeffect
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E D DE Pleverage
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repurchasing
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 stock price
not
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the profit sothey

long term goals

P value f company
Cost t capital
 share TE

expansion

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rnolders so the company
want to leave
the company
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take dept
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shareholders
leave Tt
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240 B4

to shareholders
zero distribute all income
assume tax Unlevered
levered D o
to
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20,000

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a
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240 shares
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f
ROE more effected
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to the change
in operating
income

flagdptisbetter
recommend themanager
to includedept at
normal andexpansion
scenario
 EPSU EBIT
EBSL
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31600
betterto
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IEEE

21600
themanager 0
should not
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640
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dept
 Case 1 19 bankruptcy cost

T 0 BC 0
Un Vi

P2 WACC RE
P

Case 2 1961

To BC 0

V
WACC RE
P

Case 3 1963

P
TIBET V
WACC RE

is similar
market expectation can
lender borrowers
investors
cost
no transaction
access to same volume of
all investors have
Information
 UEU

WACC Ru
 base
16E

Nehme

smhestcrediors infest
α
Costof total not considered
assets
11
WACC Ra

more dept risk P

leverage
shareholders more
require
premium REP
Financial risk
basin
risk
RA Rp DE
RA
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increase E
reflected
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Raulvered

RD OF

risk

EE
0.4
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 5 D 100 E 150
Ra 12 Rp
calculate RE 0.12
0.12 0.05 x 1
0.1667 16.67
What is NAC 12
WACC Ra
based on theory 12 16.67
than Ra
should be higher
Re
 reduce tax liability
1 the Toredution of cost probe P cash
flow A
 interest 8 0 6250
500

interest cyporate
7170

reduction
tax liability
0
to creditors o
to shareholders
shareholder
 increase
by 170

T RD D

complan
value of by the value
Increases
effannual interst tax sheild
L
UV PV annual interes
PV of annual int
tax sheild
in there is no taxes
EBI

V1 D
 P
withoutlimit

advantage
egfnana
 Ra 10 Rp 5
EBIT 50,000
D 70,000
Nc VL WACC Ra
the LACC of the company
1 Determine

2
BE

B 5001000
3 V 5ft

É IE ie
10.8

RE 0.1 0.1 0.05 751

 T 20
Assume that
T
v v1

021
11
50

400 000

E VE UY TD
0 2 70 000
400 000

414,000

Vt D 414,000 70,000
E
RE 344,000
o t s a o

f
o
0.1
Re
WACC
10.81

Wace 3
10 812
it
9 65