tailieunhanh - Brealey−Meyers: Principles of Corporate Finance, 7th Edition - Chapter 19

CHAPTER NINETEEN FINANCING AND VALUATION At that point we said hardly a word about financing decisions; we proceeded under the simplest possible assumption about financing, namely, all-equity financing. We were really assuming an idealized Modigliani–Miller (MM) world in which all financing decisions are irrelevant. | Brealey-Meyers V. Dividend Policy and 19. Financing and The McGraw-Hill Principles of Corporate Finance Seventh Edition Capital Structure Valuation Companies 2003 CHAPTER NINETEEN Brealey-Meyers Principles of Corporate Finance Seventh Edition V. Dividend Policy and Capital Structure 19. Financing and Valuation The McGraw-Hill Companies 2003 WE FIRST ADDRESSED problems of capital budgeting in Chapter 2. At that point we said hardly a word about financing decisions we proceeded under the simplest possible assumption about financing namely all-equity financing. We were really assuming an idealized Modigliani-Miller MM world in which all financing decisions are irrelevant. In a strict MM world firms can analyze real investments as if they are to be all-equity-financed the actual financing plan is a mere detail to be worked out later. Under MM assumptions decisions to spend money can be separated from decisions to raise money. In this chapter we reconsider the capital budgeting decision when investment and financing decisions interact and cannot be wholly separated. In the early chapters you learned how to value a capital investment opportunity by a four-step procedure 1. Forecast the project s incremental after-tax cash flow assuming the project is entirely equity-financed. 2. Assess the project s risk. 3. Estimate the opportunity cost of capital that is the expected rate of return offered to investors by the equivalent-risk investments traded in capital markets. 4. Calculate NPV using the discounted-cash-flow formula. In effect we were thinking of each project as a mini-firm and asking How much would that mini-firm be worth if we spun it off as a separate all-equity-financed enterprise How much would investors be willing to pay for shares in the project Of course this procedure rests on the concept of value additivity. In well-functioning capital markets the market value of the firm is the sum of the present value of all the assets held by the firm1 the whole equals .