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(^266) Financial Management There are three points to be noted here. As the cost of total capital and debt is constant, the cos ...

Capital Structure Theories^267 VL = VU = o,L ke,L EBIT k EBIT= Here the subscript L is used to denote Leveraged firm and subscri ...

(^268) Financial Management From the above particulars, it can be seen that the value of leveraged firm Y is higher than that of ...

Capital Structure Theories^269 Let us assume the valuation of the two firms X and Y is the other way around and is as follows: I ...

(^270) Financial Management the value of the unlevered firm, V1, for total return to be equal. For example, if the investors can ...

Capital Structure Theories^271 value of a levered firm should tend to exceed that of the unlevered firm for this very reason. Th ...

(^272) Financial Management Interest tax shield (INTS) is an inflow to the firm and therefore, it is valuable. Suppose that firm ...

Capital Structure Theories^273 the value of firm L (the levered firm) is equal to the value of the unlevered firm plus the prese ...

(^274) Financial Management T is the corporate tax rate and L is debt ratio. The levered firmís cost of capital is shown in Figu ...

Capital Structure Theories^275 Table: Income of Investors of Unlevered and Levered Firms: Income Income Firm U Firm L EBIT, X ...

(^276) Financial Management purpose. In India, for example interest income is tax exempt upto Rs 7,000 for individuals. After th ...

Capital Structure Theories^277 PVINTS =    = Thus the formula for PVINTS in the case of a positive personal tax rate ...

(^278) Financial Management In case of the levered firm, the shareholderís earnings will be: (X - kdD)(l - T)(1 - Tpe) ...(21) a ...

Capital Structure Theories^279 In terms of the corporate borrowing, Millerís model [Equation (25)] indicates the following. If t ...

(^280) Financial Management Figure 11.3: Aggregate supply and demand for borrowoing l The personal tax rate on equity income is ...

Capital Structure Theories^281 extent of diversification etc. Financial distress occurs when the firm finds it difficult to hono ...

(^282) Financial Management shrinks. The optimum point is reached when the present value of the tax benefit becomes equal to the ...

Capital Structure Theories^283 = ba  
     
 =b+ b-b -^ (^) + ...(32) We can observe from Equation (32) that the ...

(^284) Financial Management be = ba
      $  $ ...(36) Illustration 2: Nicole Publishing Companysí market va ...

Capital Structure Theories^285 Cost of Equity and Beta of a Division It has been argued that in evaluating a divisionís investme ...