Principles of Corporate Finance

Taxes and Dividend Policy w Since capital gains are taxed at a lower rate than dividend income, companies should pay the lowest ...

Taxes and Dividend Policy After tax rate of return (%) 100 10. 0 100 10. 0 Total(div After cap gainTax -incometaxes) ( 0 12. 50 ...

Taxes and Dividend Policy 1998 Marginal Income Tax Brackets Income Bracket Marginal Tax Rate Single Married (joint return) 15% $ ...

Taxes and Dividend Policy Rate of Income tax 0% 39.60% Operating Income 100 100 Corporate tax (Tc=.35) 35 35 After Tax income (p ...

Taxes and Dividend Policy Rate of Income tax 15% 33% 47% Operating IncomeCorporate tax (Tc=.33) (^100351003310033) After Tax inc ...

u Does Debt Policy Matter? Principles of Corporate Finance Brealey and Myers Sixth Edition Chapter 17 ...

Topics Covered w Leverage in a Tax Free Environment w How Leverage Effects Returns w The Traditional Position ...

M&M (Debt Policy Doesn’t Matter) w Modigliani & Miller ËWhen there are no taxes and capital markets function well, it ma ...

M&M (Debt Policy Doesn’t Matter) Assumptions w By issuing 1 security rather than 2, company diminishes investor choice. This ...

Example - Macbeth Spot Removers - All Equity Financed Return on shares (%) 5 % 10 15 20 Earnings per share $.50 1.00 1.50 2.00 O ...

Example cont. 50% debt M&M (Debt Policy Doesn’t Matter) Return on shares (%) 0% 15 25 30 Earnings per share $0 1 2 3 Equity ...

Example - Macbeth’s - All Equity Financed Debt replicated by investors Return on $10 investment (%) 0% 10 20 30 Net earnings o ...

MM'S PROPOSITION I If capital markets are doing their job, firms cannot increase value by tinkering with capital structure. V is ...

Proposition I and Macbeth Expected return per share (%) 15 20 Price per share ($) 10 10 Expected earnings per share ($) 1.50 2.0 ...

Leverage and Returns market value of all securities Expected return on assets = ra = expected^ operating^ income       × + ...

M&M Proposition II 101500 , 000.^15 market value of all securities r r expected^ operating^ income E A = = = = E A (rA rD) V ...

M&M Proposition II 101500 , 000.^15 market value of all securities rE rA expected^ operating^ income = = = = rE =rA +VD (rA ...

r D E rD rE M&M Proposition II rA Risk free debt Risky debt ...

Leverage and Risk Return on shares 0 20 50 % debt: Earnings per share ($) 0 2 Return on shares 5 15 All equity Earnings per shar ...

Leverage and Returns       × +  +      × + A = D BE D E B E D A B D E A (BA BD ) V D B = B + − ...