第五次作业答案 a) In an M&M frictionless environment, where there are no taxes and contracts are costless to make and enforce, the wealth of the shareholders is the same no matter what capital structure the firm adopts In such an environment, neither the stock price nor shareholders wealth would be affected. In the real world divido's management might be able to create shareholder value by issuing debt and repurchasing shares in two ways By reducing corporate taxes By reducing the free cash flow available to management and exposing itself to greater arket discipl b) The formula for EPS without debt is EBIT EPSallequity1.000,000 If we assume the interest rate is 6%(conclusions will not change if you assume different interest rates), then the interest payments will be $1. 2 million per year(20 x0.06=1.2) regardless the realised value of EBIT. The number of shares outstanding after exchanging debt for equity will be 800,000. EPS with debt is therefore EBIT-1.2 EPSdebt800, 000 The probability distribution of Divido's EBIT and EPS is as follows With $20 million Debt State of EBIT Net Earnings EPS (million)(I million shares (million) (800,000 shares) Bad 4 $2.8 $3.5 Fair S12 S12 $l08 13.5 Good 20 $l8.8 23.5 N Standard 6.53 s8.16 Although the shares of stock become riskier with debt financing, the expected earnings per share go up. In a frictionless financial environment, the net effect is to leave the price第五次作业答案 1. a) In an M&M frictionless environment, where there are no taxes and contracts are costless to make and enforce, the wealth of the shareholders is the same no matter what capital structure the firm adopts. In such an environment, neither the stock price nor shareholders' wealth would be affected. In the real world Divido's management might be able to create shareholder value by issuing debt and repurchasing shares in two ways: − By reducing corporate taxes − By reducing the free cash flow available to management and exposing itself to greater market discipline. b) The formula for EPS without debt is 1,000,000 all equity EBIT EPS = If we assume the interest rate is 6% (conclusions will not change if you assume different interest rates), then the interest payments will be $1.2 million per year ( 200.06 =1.2 ) regardless the realised value of EBIT. The number of shares outstanding after exchanging debt for equity will be 800,000. EPS with debt is therefore 800,000 1.2 debt − = EBIT EPS The probability distribution of Divido's EBIT and EPS is as follows: State of Economy EBIT (million) All Equity Financing With $20 million Debt EPS (1 million shares) Net Earnings (million) EPS (800, 000 shares) Bad $4 $4 $2.8 $3.5 Fair $12 $12 $10.8 $13.5 Good $20 $20 $18.8 $23.5 Mean $12 $13.5 Standard Deviation $6.53 $8.16 Although the shares of stock become riskier with debt financing, the expected earnings per share go up. In a frictionless financial environment, the net effect is to leave the price of stock unchanged. 2