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Recapitalization
MM2: Convert this formula to returns (weighted cost of capital)
Same Example with Cost of Distress -> VL = VU + PV (Interest Tax Shield) – PV (Financial Distress Costs)
Tradeoff Theory: Finding
Optimal Point on the
Capital Structure
Spectrum
Chapter 21: Valuation and Leverage Chapter 10: CAPM = Security Market Line -> visual representation of CAPM model (MRP=slope) etc.
Chapter 13:
Difference between E[R] and rs is known as alpha
U
1) Determine investment’s value without leverage, V , by
discounting its FCFs at unlevered cost of capita, r U
2) Determine then discount to get PV(ITS). If constant
debt-equity ratio, use rU
3) Add the unlevered value, VU, to the PV of the interest
tax shield to determine the value of the investment with
leverage, VL