AFF 310 Midterm: Cheat Sheet 2 AFF 310
Document Summary
Debt reduces taxes comp. has to pay risk of bankruptcy increases cost of debt (higher return wanted by investors) Bankruptcy affects agency costs (wasteful spending vs underinvestment) Leverage and roe: good year - pays fix interest and has more leftover, bad year - has to pay fix interests and less leftover. Roe = net income or eps share price equity: firm with debt: wider roe variation (interest, if ebit is high, eps & roe are raised, if ebit is low, eps & roe decrease break-even ebit: ebit (solve eq. ) Operating leverage: small change in sales = large change in equity roe (proposed) Modigliani & miller (mm) - perfect world (vl=vu: no taxes, no bankruptcy costs, investors can borrow at same rate as company, investors have same info as management, ebit not affected by debt. V - value of firm / d - debt / e - equity (v-d) current: V=500 / d =0 / e=500 d = 0 proposed:
