FIN 450

Rami Ahmed Al Hasan @16253
Elias Elkoussa @17067
May Mohammed @14325
Deena Shalab@16457
Reem Hani Arab @16185 CASE 4
An Introduction to Debt Policy and Value

1
(Table format and content from case) 0% debt/100% equity 25%debt/75% equity 50%debt/50% equity
BV of debt 0 $2,500 $5,000
BV of equity $10,000 $7,500 $5,000
MV of debt 0 $2,500 $5,000
MV of equity $10,000 $8,350 $6,700
Pretax cost of debt 0.07 0.07 0.07
After-tax cost of debt 0.0462 0.0462 0.0462
Market Weight of Debt 0 0.23 0.43
Market Weight of Equity 1.0 0.77 0.57
Un-levered Beta 0.8 0.8 0.8
Risk free rate 0.07 0.07 0.07
Market premium 0.086 0.086 0.086
Cost of equity 13.88% 15.4% 20.8%
WACC 13.88% 13.5% 13.8%
EBIT $2,103 $2,103 $2,103
- Taxes - 34% $1,388 $1,388 …show more content…

This way the number of investors in a certain company is not limited only to equity shareholders.

7. Before capitalization After recapitalization
Book value Balance sheets
Net working capital $212,453 $212,453
Fixed Assets 601,446 601,446
Total Assets 813,899 813,899
Long term debt 1,72,409 1,738,095
Deferred taxes 195,616 195,616
Preferred stock 15,000 15,000
Common equity 430,873 -1,134,813 (430,873-1,565,686)
Total capital 813,899 813,899
Market value balance sheets
Net working capital 212,453 212,453
Fixed assets 1,618,081 1,618,081
PV debt tax shield 58,619 590,952
Total assets 1,889,153 2,421, 487
Long term debt 1,72,409 1,738,095
Deferred taxes 0 0
Preferred stock 15,000 15,000
Common equity 1,701,744 668,392
Total capital 1,889,153 2,421, 487
Number of shares 28,128 28,128
Price per share 60.5 79.4
Value to public shareholders
Cash received 0 1,565,686
Value of shares 1,701,744 668,392
Total value