Appendix 17A - Some Useful Formulas of Financial Structure - (McGraw-Hill)
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QuantDev-MAppendix 17A - Some Useful Formulas of Financial Structure - (McGraw-Hill)
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QuantDev-MChapter 17 Capital Structure 17A-1
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Some Useful Formulas of Financial Structure
Definitions:
E(EBIT) 5 A perpetual expectation of cash operating income before interest and
taxes.
V
U
5 Value of an unlevered firm.
V
L
5 Value of levered firm.
B 5 Present value of debt.
S 5 Present value of equity.
R
S
5 Cost of equity.
R
B
5 Cost of debt capital.
R
0
5 Cost of capital to an all-equity firm. In a world of no corporate taxes, the
weighted average cost of capital to a levered firm, R
WACC
, is also equal to
R
0
. However, with corporate taxes, R
0
is above R
WACC
for a levered firm.
Model I (No Tax):
V
L
5 V
U
5
E(EBIT)
________
R
0
R
S
5 R
0
1 (R
0
2 R
B
) 3 ByS
Model II (Corporate Tax, t
C
. 0; No Personal Taxes, t
S
5 t
B
5 0):
V
L
5
E[EBIT] 3 (1 2 t
C
)
_________________
R
0
1
t
C
R
B
B
______
R
B
5 V
U
1 t
C
B
R
S
5 R
0
1 (1 2 t
C
) 3 (R
0
2 R
B
) 3 ByS
Model III (Corporate Tax, t
C
. 0; Personal Tax, t
B
. 0; t
S
. 0):
V
L
5 V
U
1
f
1 2
(1 2 t
C
) 3 (1 2 t
S
)
________________
(1 2 t
B
)
g
3 B
Appendix 17A
ros34779_app17A.indd 17A-1 9/24/12 7:44 PM
