Principles of Corporate Finance

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 earnings $0 500 1,000 1 , 500

Interest $500 500 500 500

Operating Income $500 1,000 1,500 2 , 000

A B C

Outcomes

Market value of debt $ 5,000

Market Value of Shares $ 5,000

Price per share $10

Number of shares 500

Data

D