tailieunhanh - Lecture note Essentials of corporate finance – Chater 13: Leverage and capital structure

In this chapter you will understand the effect of financial leverage on cash flows and cost of equity, understand the impact of taxes and bankruptcy on capital structure choice, understand the basic components of bankruptcy. | 13- Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 13- Key Concepts and Skills Understand: The effect of financial leverage on cash flows and cost of equity The impact of taxes and bankruptcy on capital structure choice The basic components of the bankruptcy process 13- Chapter Outline The Capital Structure Question The Effect of Financial Leverage Capital Structure and the Cost of Equity Capital Corporate Taxes and Capital Structure Bankruptcy Costs Optimal Capital Structure Observed Capital Structures A Quick Look at the Bankruptcy Process 13- Capital Structure Capital structure = percent of debt and equity used to fund the firm’s assets “Leverage” = use of debt in capital structure Capital restructuring = changing the amount of leverage without changing the firm’s assets Increase leverage by issuing debt and repurchasing outstanding shares Decrease leverage by issuing new . | 13- Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 13- Key Concepts and Skills Understand: The effect of financial leverage on cash flows and cost of equity The impact of taxes and bankruptcy on capital structure choice The basic components of the bankruptcy process 13- Chapter Outline The Capital Structure Question The Effect of Financial Leverage Capital Structure and the Cost of Equity Capital Corporate Taxes and Capital Structure Bankruptcy Costs Optimal Capital Structure Observed Capital Structures A Quick Look at the Bankruptcy Process 13- Capital Structure Capital structure = percent of debt and equity used to fund the firm’s assets “Leverage” = use of debt in capital structure Capital restructuring = changing the amount of leverage without changing the firm’s assets Increase leverage by issuing debt and repurchasing outstanding shares Decrease leverage by issuing new shares and retiring outstanding debt 13- Capital Structure & Shareholder Wealth The primary goal of financial managers: Maximize stockholder wealth Maximizing shareholder wealth = Maximizing firm value Minimizing WACC Objective: Choose the capital structure that will minimize WACC and maximize stockholder wealth 13- “Financial leverage” = the use of debt Leverage amplifies the variation in both EPS and ROE We will ignore the effect of taxes at this stage What happens to EPS and ROE when we issue debt and buy back shares of stock? The Effect of Financial Leverage 13- Trans Am Corporation Example 13- Trans Am Corp With and Without Debt 13- Leverage Effects Variability in ROE Current: ROE ranges from to Proposed: ROE ranges from to Variability in EPS Current: EPS ranges from $ to $ Proposed: EPS ranges from $ to $ The variability in both ROE and EPS increases when financial leverage is increased Return to Quick