Coporate Finance Case Study - 5492 Words

___________________________________________________________________ Case Study corporate finance Case 28 – An Introduction to Debt Policy and Value Case 30 – MCI Communications, Corp.: Capital Structure Theory ___________________________________________________________________ Table of Contents Case 28 - An Introduction to Debt Policy and Value 3 Effects of Debt on the Value of the Firm 3 Split of Value between Creditors and Shareholders 4 Source of Value Creation 4 Effects on Value per Share 5 The Benefits of Leveraging for the Shareholders 6 The Macroeconomic Benefit of Debts 7 Koppers Company, Inc. 7 Case 30 – MCI Communications, Corp.: Capital Structure Theory 9 Introduction 9 Cost of Capital 9 Costs of†¦show more content†¦Source of Value Creation While in table 2 is illustrated, where the additional value from an increased leverage is going, we now have a closer look at where the change in value is coming from. For this purpose, we divide the free cash flow of the firm into pure business flows and cash flows resulting from financing effects and discount them at a consistent rate reflecting the cash flows’ risk. As shown in table 3, the total value of cash flow is increasing if debt is augmented. It is also obvious that this increase in value is generated by the cash flows resulting from financing effects. But how does this gain come about? In fact, table 3 illustrates one of the most important theories in corporate finance, which says that the value of a levered firm is equal to the value of an unlevered firm plus the present value of the tax shield provided by debt (Copeland, Weston and Shastri, 2005, p. 562). Since the tax authority treats interest going to the bondholders differently from the way it treats earnings going to stockholders, there emerges a difference in the tax payment the firm has to fulfil. Actually, the firm’s tax payment is positively related to its debt, as the interest is not taken into account by corporate taxation while earnings after interest but before taxes are taxed at the existing tax rate (which in this case is 35%). The increased value of the total cash flow in table 3 arises therefore from the so-called tax shield associatedShow MoreRelatedFIN553 Penelope Case Group 2 Essay627 Words   |  3 Pagesï » ¿ FIN553 Advanced Coporate Finance Case Study: Penelopes Personal Pocket Phones Group 2 Brian Erber, Jaime Carreno, Wenliang Zhang, Xue Liu (Introduction) Background info about the project. In order to evaluate the NPV of the first-generation phone (project) ignoring the possibility of investing in the second-generation phone (project), we projected the free cash flows (FCF) of the first-generation phone through 2001 to 2006. 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