pdf to tiff conversion using c# : Adding text to a pdf in preview control SDK platform web page wpf asp.net web browser Welch-ed164-part1855

SOLVENOW!SOLUTIONS
605
.
Ifanoptimizingfirmhasexhaustedall itslower-costnonfinancialsourcesof
funding,thentheinfinitelyelasticperfectcapitalmarkets’financialfundingbecomes
themarginalsourceofcapital.
keyterms
averagecostofcapital
,601
costofcapital
,586
ex-ante
,574
ex-post
,574
fiduciaryduty
,573
marginalcostofcapital
,601
M&M
,576
Modigliani-Miller
,576
optimalcapitalstructure
,575
shareholderwealthmaximiza-
tion
,573
supervisoryboard
,573
WACC
,587
weightedaveragecost of
capital
,587
solvenow!solutions
Q16.1
Ex-antemeans“beforethefact”;ex-postmeans“afterthefact.”Totheextentthattheoriginalowner-
entrepreneurcansetupasituation(charter)thatencouragesbest(i.e.,fromtheperspectiveofthefirm)
ex-postbehavior,theex-antevalue(forwhichthefirmcanbesoldrightnow)ismaximized.However,if
thesituation(charter)issuchthattheownerhimselforhismanagerswilllatertrytoexpropriatecapital
providers,orsuchthatthemanagerswillmakebaddecisionsinthefuture,thentheex-antevaluetodayfor
whichthefirmcanbesoldwouldbeless.
Q16.2
Yes,anex-postmaximizingchoicecanbebadfromanex-anteperspective.Theexampleofthe$3-for-$1
transactioninthetextshowsthatyouwouldwanttorestrainyourself.
Q16.3
Clearly,managersinthefuturewouldwantnottopaydebtiftheycanavoiddoingso.However,such
behaviorcouldhaverepercussionsfortheirfutureattemptstoborrowmoney.Thefirmwouldhavetoweigh
thegainsfromrenegingonthisparticularloan(andtheethicalimplicationsofdoingso!)againstthecosts
ofalostcreditorrelationshipandthusmoreexpensivecreditinthefuture.
Q16.4
Theideaistoexplainitreallysimply.Milk,cream,pizza,andpocketsarehandymetaphors.
Q16.5
Capitalstructuredoesnotmatterinaperfectmarket:Notransactioncosts,perfectcompetition,notaxes,
andnodifferencesinopinionandinformation.
Q16.6
Therisk-neutralityassumptionreallybuysnothing.Wedonotneedit.Weonlyuseitbecauseitmakesthe
tablessimplertocompute.
Q16.7
Workoutthefollowing:
BadLuck:
d
.
$55 +
e
.
$5
=
$0
.
5%
GoodLuck:
d
.
$55 +
e
.
$105 = = $66
.
5%
⇒($105−$5)
.
e=($66−$0)
.
5%
⇒
d = = −0.003
e = = +0.033
Youwouldpurchase3.3%oftheLDequityandsell(issue)0.3%oftheequivalentoftheLDdebt.Theequity
wouldcostyoue
.
$50=$1.65;thedebtissuewouldgiveyou$0.15inproceeds.Yournetcostwouldthus
be$1.50—asitshouldbe,becausepurchasing5%oftheMDequitywouldhavecostyou5%of$30,which
alsocomesto$1.50.
Adding text to a pdf in preview - C# PDF Annotate Library: Draw, edit PDF annotation, markups in C#.net, ASP.NET, MVC, Ajax, WPF
Draw, Add and Edit Various Annotations on PDF File in C# Programming
add text in pdf file online; add text pdf
Adding text to a pdf in preview - VB.NET PDF Annotate Library: Draw, edit PDF annotation, markups in vb.net, ASP.NET, MVC, Ajax, WPF
Guide to Draw, Add and Edit Various Annotations on PDF File in VB.NET Programming
add comments to pdf file; adding text to a pdf in preview
606
CHAPTER16
CAPITALSTRUCTUREANDCAPITALBUDGETINGINAPERFECTMARKET
Q16.8
No.The“homemadeleveragerestructuring”argumentmissestheaspectofcontrolrights.
Q16.9
Yes,theycandestroyshareholdervalue.Ifexistingmanagementgivesawaydebtclaimsattoolowaprice,
creditorswillownmoreofthefirmhavingpaidlessmoney.Newmanagementcannotundothis,because
thecontractcannotberenegotiated.Givingawaydebttoocheaplywouldnotchangethevalueofthefirm.
Itonlychangeswhoownsmoreorlessofthefirm.
Q16.10 Toworkoutthefirm’sequitycostofcapitalandthedebt’spromisedrateofreturn,imitatethepayofftables
fromthetext(dollarsareinmillions):
SchemeAE
SchemeDE
Bond
LeveredEquity
100%Equity
(promises$100) (after$100obligation)
Prob=1/3
$50
$50
$50
$0
Prob=1/3
$150
$150
$100
$50
Prob=1/3
$400
$400
$100
$300
EFuturePayoff
$200
$83.33
$116.67
PricePToday
$181.82
$79.37
$102.45
ERateofReturn(E(˜r))
10%
5%
13.88%
Thedebt’spromisedrateofreturnis$100/$79.37−1≈26%.
Q16.11 Youneedtorecallthestandarddeviationformula(Formula8.1)onpage204:
FullOwnership: Sdv=
0.20
.
(−73.81%−10%)+0.80
.
(+30.95%−10%)≈ 41.9%
Debt:
Sdv=
0.20
.
(−20%−6%)2+0.80
.
(+12.5%−6%)2
= 13%
LeveredEquity: Sdv=
0.20
.
(−100%−11.95%)2+0.80
.
(+39.93%−11.95%)2≈55.97%
Q16.12 Mostlikely,youcanfundtheproject.Inaperfectmarket,youcanholdlow-riskdebtthathasfirstdibson
allproceeds.
Q16.13 Pleasereworktheexamplesforyourself.Forexample,forthepromiseddebtof$50,000:Iftheweightis
53.72%,thentheexpectedrateofreturnonthedebtshouldbe4.053%+5.947%
.
53.72%≈7.25%.
Q16.14 Fortheexamplefrompage589,inwhichthedebtpromises$75,000,toconfirmthattheweightofthedebt
inthecapitalstructureis77.14%,constructthefullpayofftable:
Bond
LeveredEquity
100%Equity
(promises$75,000) (after$75,000obligation)
Prob(Sunshine)=80% $100,000.00
$100,000.00
$75,000.00
$25,000.00
Prob(Tornado)=20%
$20,000.00
$20,000.00
$20,000.00
$0.00
EFuturePayoff
$84,000.00
$64,000.00
$20,000.00
ERateofReturn(E(˜r))
10%
8.64%
14.59%
PricePToday
$76,363.64
$58,910.16
$17,453.48
CapitalStructureWeight(SecurityPrice/FirmValue)
77.14%
22.86%
PromisedRateofReturn(BondPromise/BondPrice−1)
27.31%
C# PDF insert text Library: insert text into PDF content in C#.net
Supports adding text to PDF in preview without adobe reader installed in ASP.NET. Powerful .NET PDF edit control allows modify existing scanned PDF text.
add comments to pdf document; add crop marks to pdf online
VB.NET PDF insert text library: insert text into PDF content in vb
Multifunctional Visual Studio .NET PDF SDK library supports adding text content to adobe PDF document in VB.NET WinForms and ASP Add text to PDF in preview
adding text to pdf reader; add notes to pdf file
SOLVENOW!SOLUTIONS
607
Q16.15 No.FirmAneednothaveahigheroverallcostofcapitalthanfirmB.Theexampleinthe“HowBadAre
Mistakes?”sectionillustratesthisfallacy.Therelativeweightsofdebtandequityalsochange,therefore
falsifyingthisclaim.
Q16.16 Thesolutionproceedsthesamewayasinthetextonpage396(Chapter12):
(a)TheprojectshouldhaveanappropriaterateofreturnofE(˜r)=3%+4%
.
0.5=5%.Itisimmediately
obviousthattheproject’scostofcapitalof5%isbelowitsinternalrateofreturnof$11/$10−1=10%.
Thenetpresentvalueoftheprojectis−$10+$11/1.05≈$0.48million.Yes,thefirmshouldtakeit.
(b)Ifthefirmusesacostofcapitalbasedonitsbetaof3,itwouldconcludethatthevalueisE(˜r)=
3%+4%
.
3=15%.Thus,withits10%expectedrateofreturnasitsinternalhurdlerate,amisguided
firmwouldnottakethisproject.Thismeansthatthefirmloses$0.48millioninvalueitcouldhave
otherwisegained,simplybecausethefirmmanagersaremakingthemistakeofnottakingthepositive-
NPVproject.Thisisbecausetheydonotunderstandthatprojectsshouldbeevaluatedbytheprojects’
owncostsofcapital,notthefirm’scostofcapital.
(c)Thevalueofthenewprojecttodayis$11/1.05≈$10.48million.Thevalueoftheoldprojectswasgiven
as$100million.Thus,thevalueofacombinedfirmwithallprojectswouldbeabout$110.48million.
(d)Toraise$10million,thefirmneedstogiveup$10/$110.48≈9.05%ofthecombinedfirmtonew
shareholders.
(e)$10.48millionwouldbefromthenewproject.$100millionwouldbefromtheoldproject.Thus,
$10.48/110.48≈9.49%ofthefirmvaluewouldbeinthenewproject.Theremaining90.51%wouldbe
intheoldprojects.
(f) Themarketbetaofthecombinedfirmwouldbe90.51%
.
3+9.49%
.
0.5≈2.763.
(g)Theaveragecostofcapitalwouldnowbe3%+4%
.
2.763≈14.05%.
Insum,thevalueofthefirmwouldjumpbythenetpresentvalueofthenewproject,thatis,by$0.48
million.Nomorecalculationsarenecessary.However,youcanalsodothisbycomputingthediscounton
theentirefirm.First,tobeworth$100millionatacostofcapitalof15%,theexpectedpayoffsnextyearhave
tobe$115million.Thefuturevalueofthecombinedfirmistherefore$115+$11=$126million,andits
presentvalueis($115+$11)/(1+14.05%)≈$110.48million.
Q16.17 No,itisquitepossiblethattheweightedaveragecostofcapitalislowerthantheinterestratethatithasto
paytothebank.Afterall,thebankrateispromised,notexpected.
Q16.18 Inaperfectmarket,thecostofcapitalundera100%equityfinancingstrategywithcost10%mustbethe
sameasitisunderamixeddebtandequitystrategy.Therefore,w
Debt
.
0.05+(1−w
Debt
)
.
0.2=0.1⇒
w
Debt
=2/3.Thisfirmis2partsdebt,1partequity,sothedebt/equityratiois2.
Q16.19 Thoughobscure,afirmwithaverynegativebetacanindeedbeinthissituation.Itmustbethecasethen
thatthefirm’sprojectcostofcapitalislowerthantherisk-freerate.(Forexample,afirmmayhave90%debt
attherisk-freerateof5%,10%equityatarateof−1%,andaWACCof4.4%—thisisindeedlessthanthe
risk-freerate.)
Q16.20 No,thevalueofthefirmmaybelinkedtoitsfinancing,becauseitsfinancingislinkedtoitsprojects.You
alsoneedtobreakthelinkbetweennonfinancialliabilitiesandoperations.
Q16.21 Yes,thevalueofthefirm’sfinancialclaimsisindependentofhowthefinancialclaimsarearrangedinan
M&Mworld.ThisisbecausenofinancialsecurityoffersapositiveornegativeNPV—allfinancialsecurities
arefairlypriced.
Q16.22 Yes,itmaystillmakesensetocomputeacostofcapitalbasedonlyonthefirm’sfinancialcapital(debtand
equity)ifthefirmhasexhaustedallitsnonfinanciallow-costsourcesofcapital.Itisthenanestimateofthe
marginalcostofanotherdollarofcapitalraised,whichisnowfinancialcapital.
C# PDF insert image Library: insert images into PDF in C#.net, ASP
viewer component supports inserting image to PDF in preview without adobe this technical problem, we provide this C#.NET PDF image adding control, XDoc
add comments to pdf in preview; adding text to a pdf in reader
C# PDF Page Insert Library: insert pages into PDF file in C#.net
applications. Support adding and inserting one or multiple pages to existing PDF document. Forms. Ability to add PDF page number in preview. Offer
adding notes to a pdf; adding text to pdf
608
CHAPTER16
CAPITALSTRUCTUREANDCAPITALBUDGETINGINAPERFECTMARKET
problems
The
indicatesproblemsavailablein
Q16.23 Explainwhen“shareholdermaximization”is
therightgoalandwhenitisthewronggoalfor
management.
Q16.24 Commentonthefollowingstatement:“New
shareholderswouldbeworseoffifmanage-
mentdestroyedwealthbycapturingtheboard
andpayingthemselvesmuchhigherexecutive
compensationwithoutbetterperformance.”
Q16.25 Inaworldthatisnotperfectbutriskneutral,
assumethatthefirmhasprojectsworth$100in
thedown-state,$500intheup-state.Thecost
ofcapitalforprojectsis25%.However,ifyou
couldfinanceitwith50-50debt,thecashflow
rightsaloneareenoughtomakethecostof
capitalalower20%.Managersareintransigent
anddonotwanttoswitchtothisnewcapital
structure.Youonlyhave$60ofcapitaland
cannotborrowmoretotakeoverthefirm.
Whatcanyoudo?
Q16.26 Afirmcanbeworth$100million(with20%
probability),$200million(with60%probabil-
ity),or$300million(with20%probability).
Thefirmhasoneseniorbondoutstanding,
promisingtopay$80million.Italsohasone
juniorbondoutstanding,promisingtopay$70
million.Theseniorbondpromisesaninterest
rateof5%.Thejuniorbondpromisesaninter-
estrateof26%.Ifthefirm’sprojectsrequirean
appropriatecostofcapitalof10%,thenwhat
isthefirm’sleveredequitycostofcapital?
Q16.27 Ifachangeincapitalstructureincreasesthe
riskofthefirm’sequityandtheriskofthe
firm’sdebt,andtherearenootherfinancial
claims,doesitimplythefirm’sriskhasin-
creased?
Q16.28 Worktheexamplefrompage590ifthedebt
promises$65,000.Confirmthattheweightof
thedebtinthecapitalstructureis67.85%.
Q16.29 Whenbothdebtandequitybecomeriskier
duetoanincreaseinthefirm’sleverage,the
firmremainsworthexactlythesameand
staysexactlyasrisky(inaperfectmarket).
Conceptually,whatwouldittakeforthefirm
tobecomeworthmoreand/orsaferevenwhen
bothdebtandequitybecomeriskierduetoan
increaseinthefirm’sleverage?
Q16.30 ComputeagraphsimilartoFigure16.1.Use
aspreadsheet.Yourfirmwillbewortheither
$50,000or$100,000withequalprobabilities.
Thecostofcapitalonyourdebtisgivenbythe
formulaE(˜r
Debt
)=5%+10%
.
w
Debt
—but
onlyifthedebtisrisky.(Hint:Therisk-free
rateofreturnis11.85%.WhatistheWACCof
thefirmifitis100%debtfinanced?)
Q16.31 Showhowafirmcanincreaseitscostofequity
capitalanditscostofdebtcapital,andstill
comeoutwithanoverallcostofcapitalthatis
unchanged.
Q16.32 DoesthestandardM&Mpropositionapplyto
nonfinancialliabilities?
Q16.33 Inaworldofperfectfinancialmarkets,isthe
costofcapitalofthefirm’sfinancialclaims
independentofhowitisfinanced?
Q16.34 Inaworldofperfectfinancialmarkets(but
notnecessarilyproductmarkets),isthecost
ofcapitalofthefirmindependentofhowitis
operatedandfinanced?
C# Create PDF Library SDK to convert PDF from other file formats
C#.NET using this PDF document creating toolkit, if you need to add some text and draw Besides, using this PDF document metadata adding control, you
.net read pdf text; adding text to a pdf form
C# TIFF: TIFF Editor SDK to Read & Manipulate TIFF File Using C#.
Easy to generate image thumbnail or preview for Tiff 1. Support embedding, removing, adding and updating ICCProfile. 2. Render text to text, PDF, or Word file.
add comments to pdf in reader; adding comments to pdf file
TheWeightedCostofCapitaland
AdjustedPresentValueinan
ImperfectMarketwithTaxes
THECORPORATEINCOMETAXADVANTAGEOFDEBT
N
owthatyouunderstandhowfinancingworksinaperfectworld,itistimeto
moveontotherealandimperfectworld.Thepresenceofcorporateincome
taxesisanimportantviolationoftheM&Mperfect-marketassumptions
intherealworld.Thischaptershowsthatyoucancreatevaluethroughintelligent
capitalstructurepolicythatreducesthesetaxes.Thereareevenformulasthathelp
youcomputetheexplicittax-valueconsequencesfordifferentleveragestructures.
Themostpopulararetheadjustedpresentvalue(APV)formulaandthetax-adjusted
weightedaveragecostofcapital(WACC)formula.Thesetechniquesareinsuchwide
usethattheydeservealotofairtime—andwhythischapteriskeptseparatefromthe
followingone,whichwilldiscussothermarketimperfections.
Notethatthischapterisconcernedonlywithcorporateincometaxes,andnot
investors’personalincometaxes.Fornow,ifitmakesyourthinkingeasier,justassume
thatallshareholdersaretax-exemptpensionfunds.Thenextchapterwillconsider
bothcorporateandpersonalincometaxes.
609
VB.NET PDF insert image library: insert images into PDF in vb.net
smart and mature PDF image adding component of As String = Program.RootPath + "\\" 1.pdf" Dim doc New PDFDocument(inputFilePath) ' Get a text manager from
add text boxes to pdf document; adding stamps to pdf files
C# PowerPoint - Insert Blank PowerPoint Page in C#.NET
This C# .NET PowerPoint document page inserting & adding component from RasterEdge is written in managed C# code and designed particularly for .NET class
adding annotations to pdf; adding text to a pdf in acrobat
610
CHAPTER17
THEWEIGHTEDCOSTOFCAPITALANDADJUSTEDPRESENTVALUEINANIMPERFECTMARKETWITHTAXES
17.1 RELATIVETAXATIONOFDEBTANDEQUITY
Let’sdiscussasimplehypotheticalfirmwiththefollowingparameters:
Abasiccorporateexample
withequaltaxation.
InvestmentCostinYear0
$200
Before-TaxReturninYear1
$280
Before-TaxNetReturnfromYear0toYear1
$80
CorporateIncomeTaxRate(τ)
30%
AppropriateCostofCapitalfrom0to1
12%
Yourgoalistounderstandthevalueofthisfirmunderdifferenttaxregimes.
17.1A HYPOTHETICALEQUALTAXATIONANDCAPITALBUDGETING
Ifthefirmfacesthesametaxrateondebtandequity,nomatterhowitisfinanced,
Thisshortsection’sunrealistic
taxcode.
whatisitsvalue?Intherealworld,thisassumptionisentirelyunrealistic.(Instead,
onlyinterestpaymentsaretaxdeductible).Thisscenarioisusefulonlytoshowthat
investorscareabout“aftercorporateincometax”returns,notabout“beforecorporate
incometax”returns.
Underthistaxregime,considerfinancingyourfirmentirelywithequity.With
Taxesmeanthattheafter-tax
rateofreturnislowerthanthe
before-taxrateofreturn.
$280inbefore-taxearningsonthe$200investment,youhaveabefore-taxinternal
rateofreturnof($280−$200)/$200=40%.But,withtaxestothetuneof30%on
thenetreturnof$80,UncleSamcollects$24.Yourfirm’safter-taxnetrateofreturn
isthereforeonly($256−$200)/$200=28%.
Nowholdyourinvestors’otheropportunitiesintheeconomyconstant.Whatis
Investorsreceiveanafter-
corporate-income-taxrateof
returnfromthe“black-box”
firm.
theinfluenceofachangeinthecorporateincometaxthatisapplicableonlytoyour
firm?Fromtheperspectiveofyourfirm,youarea“price-taker”whenitcomesto
raisingcapital.Thismeansthatyouaretoosmalltomakeadifference.Afterall,you
arecompetingwithmanyotherfirmsforthecapitalofmanycompetitiveinvestors.
Ultimately,theseinvestorscareonlyaboutthecashthatyouwillreturntothem.Let
usassumethatfirmsofyourriskclass(marketbeta)mustofferanafter-corporate-
income-taxrateofreturnofE(˜r
Firm
)=12%toattractinvestors.This12%isthe
equivalentofa17.14%before-taxrateofreturn, because17.14%
.
(1−30%)=
12%.Putdifferently,youcaninvest$100inequallyriskyprojectselsewhere,expect
toreceiveback$117.14,payUncleSam$5.14intaxeson$17.14inearnings,andkeep
$12.(Inthischapter,weagainomittimesubscriptsifthereislittleriskofconfusion.)
Howexactlydotaxesmattertotherateofreturnthatyourprojectsmustgenerate?
Yourinvestor-ownersreallydonotcarewhathappensinsidethefirm,onlywhat
Projectswithmoretaxliability
mustcreatemorevaluebefore
taxestobeonequalfooting
aftertaxes.
yourfirmcanpaythemintheend.Itisallthesametothemif:
.
yourprojectsearn12%beforetaxandyoumanagetoavoidallcorporateincome
taxes;
.
yourprojectsearn24%butyouhavetopayhalfofitincorporateincometaxes;
.
yourprojectsearn600%,ofwhich98%isconfiscatedbythegovernment(600%
.
(1−98%)=12%);or
.
yourprojectsfacea30%corporatetaxrate,andyourownprojectsearn17.14%in
before-taxrateofreturninordertogenerateforyourinvestors12%inactualrateof
C# Word - Insert Blank Word Page in C#.NET
This C# .NET Word document page inserting & adding component from RasterEdge is written in managed C# code and designed particularly for .NET class applications
add text pdf professional; add text field pdf
C# PowerPoint - How to Process PowerPoint
slides/pages in the simplest procedures, for instance, using online clear C# methods to add, insert or delete any specific PowerPoint slide, adding & burning
adding text field to pdf; add stamp to pdf file
17.1 RELATIVETAXATIONOFDEBTANDEQUITY
611
ANECDOTE
SpecialTaxBreaksandCorporateWelfare
“S
pecialincometaxprovisions”aretaxbreaksen-
actedbyCongressforspecificactivities,oftenon
behalfofasinglecorporation.Thesespecialincometax
provisionamountsarecommonlyestimatedtobeabout
$1trillionayear—morethanthetotalamountoffederal
discretionaryspending!Theseprovisionsareamainrea-
sonwhycorporations—largecorporations,really—have
paidlessandlessinincometaxesrelativetotherestof
thepopulationandrelativetootherOECDcountries.In
1965,corporateincometaxeswere4.1%ofU.S.GDP;in
2000,about2.5%;andin2002,about1.5%.Forcompar-
ison,in2000,Germany’sratewas1.8%,andCanada’s
ratewas4.0%.
ItwouldbewonderfulifthelowU.S.corporateincome
taxratewouldattractbusinessestolocateintotheUnited
Statesandtocreatejobs.Alas,becausetheloweffective
corporateincometaxratescomeaboutthroughstrange
corporatetaxshelters(oftenthroughrelocationofhead-
quartersintoforeigncountries),theUnitedStatesoften
endsupwiththeworstofbothworlds:Bothincentives
forcompaniestomoveoutoftheUnitedStatesandlow
corporateincometaxreceipts.Theonlypresidentinre-
centhistorytobuckthetrend mayhavebeenRonald
Reagan,whoslashedboththecorporateincometaxand
theabilityofcompaniestocircumventit.
Source:“TestimonyofRobertS.McIntyre”(http://www
.ctj.org),DirectorofCitizensforTaxJustice.
return.Ofcourse,thisisthesamecalculationwealreadymade.Yourinvestmentof
$200turnsinto$234.28,youpayUncleSam30%intaxesonincomeof$34.28for
atotalincometaxof$10.28,andyouareleftwith$224toreturntoyourinvestors
afterthecorporateincometaxispaid.
TheNPVformulaiswellequippedtohandlecorporateincometaxes.However,as
Investorsdemandaproper
(risk-adjusted)rateofreturn,
regardlessofhowthefirm
getsthere.
alreadyexplainedinChapter10,youmustcalculatethepresentvalueusingafter-tax
TaxesinNPV,Section
10.4C,p.325
quantitiesinboththenumeratoranddenominator.Forexample,the“$280-before-
corporate-income-tax”firm,withits12%requiredafter-corporate-income-taxcost
ofcapital,hasaPVof:
PV =
E(C
after-corp-tax
)
1+E(˜r
after-corp-tax
)
=
$280−$80
.
30%
1+12%
=
$256
1+12%
≈$228.57
Therearesomesimplemistakesyoumustavoidhere.Youcannotusuallyfindthe
sameresultifyouworkwithbefore-taxexpectedcashflowsandbefore-taxrequired
ratesofreturn.Andyouwoulddefinitelygetaverywrongresultifyouusedafter-
taxexpectedcashflowsandthencomparedthemtoacostofcapitalobtainedfrom
investmentsthathavenotyetbeentaxedatthecorporatelevel.
solvenow!
Q17.1 Assumea30%corporateincometax.Showthataprojectthatreturns
17%before-taxwouldhaveanegativeNPVifitcost$100todayandif
theappropriateafter-taxcostofcapitalis12%.
17.1B REALISTICDIFFERENTIALTAXATIONOFDEBTANDEQUITY
Let’smoveontoamodelofataxcodethatreflectsrealitybetter.Inmanycountries—
Taxcodesworldwideviolate
theM&Mno-taxassumption.
theUnitedStatesincluded—individualsandcorporationsfacesimilartaxtreatments,
taxschedules,andtaxrates.Althoughtaxcodedetailsvaryfromyeartoyear,country
612
CHAPTER17
THEWEIGHTEDCOSTOFCAPITALANDADJUSTEDPRESENTVALUEINANIMPERFECTMARKETWITHTAXES
tocountry,statetostate,countytocounty,andevencitytocity,mosttaxcodesare
prettysimilarinspirit.Thus,thetaxconceptsinthisbookapplyrelativelyuniversally.
Section10.4describedhowtheformofpayoutmatters.Firmspaytaxesontheir
Taxcodessubsidizeborrowing:
Firmspayinterestfrom
before-taxincomebutpay
dividendsfromafter-tax
income.
Introductiontotaxes,
Section10.4,p.321
earningsnetofinterestpayments.Thatis,unlikedividenddistributionsormoneyused
torepurchasesharesormoneyreinvested,theIRSconsidersinterestpaymentstobe
acostofyouroperations.Therefore,itallowsthepaymentofinteresttobetreatedas
abefore-taxexpenseratherthanasanafter-taxdistributionofearnings.Theresultis
thatacorporationsavesontaxeswhenitdistributesitsearningsintheformofinterest
payments.Forexample,ifPepsiCo’soperationsreallyproduced$100,andif$100in
interestwasowedtocreditors,thenUncleSamwouldgetnothingandthecreditors
wouldgettheentire$100.However,ifnotpaidoutininterest,UncleSamwouldfirst
collectcorporateincometaxes,say,30%.PepsiCocouldonlykeep(ordistribute)the
$70thatwouldbeleftover.ThepointofthischapteristoshowhowanastuteCFO
canbestexploitthisdifferenceinrelativetaxtreatment.
Atthispoint,youmaybewonderingwhyyouwouldnotalwaysfinanceyourfirm
Preview:Withtoomuchdebt,
othernot-yet-explainedforces
mayincreasethecostof
capital.
withasmuchdebtaspossible.Theshortpreviewansweristhatifyouwereinaworld
inwhichcorporateincometaxesweretheonlydistortion,thenhavingasmuchdebt
aspossiblewouldindeedbeideal.However,thereismoregoingon.Ifyoutakeon
toomuchdebt,eventuallyotherforcesraisethefirm’scostofcapitaltothepointthat
furtherincreasesindebtarenolongervalue-increasing.Theseforcesarethesubjectof
thenextchapter.Butyoumustfirstunderstandhowmanagersshouldgoaboutcapital
budgetingifthereareonlycorporateincometaxes,andnoothertaxesorperfect-
marketdistortions.
solvenow!
Q17.2 Adebt/equityhybridsecuritywouldliketopayout$500toitsholders.
Thefirmisinthe33%corporateincometaxbracket.Howmuchwould
thefirmhaveto earnif theIRSdesignatesthepaymentaninterest
payment?HowmuchwouldthefirmhavetoearniftheIRSdesignates
thepaymentadividenddistribution?
17.2 FIRMVALUEUNDERDIFFERENT
CAPITALSTRUCTURES
Inaperfectworld,firmsareindifferentbetweendebtandequity.Intherealworld,
Introducinganinteresttax
subsidyleadstoacorporate
preferencefordebt.
UncleSamsubsidizesfirmsthatpayinterest,relativetofirmsthatretainearnings,
paydividends,orrepurchaseshares.Therefore,oncorporatetaxgrounds,firmsshould
haveapreferencefordebt.Whatistheexactvalueofthefirminthepresenceofthis
taxsubsidyfordebtinterestpayments?
Toanswerthisquestion,beginwithTable17.1.Itworksoutthevalueofone
Ifthefirmisdebtfinanced,
thenthereismoremoneythat
canbepaidtotheowners.This
ismoneythattheIRSdoesnot
get.
hypotheticalfirmintwofinancingscenarios.
Anequity-financing(EF)scenario:Intheall-equityscenario,thefirmdoesnotex-
ploitthehelpoftheIRS.Itearns$280onaninvestmentof$200.Ata30%corporate
incometaxrate,itwillpaycorporateincometaxesof30%
.
$80=$24.Itcanthen
payouttheremaining$56individends.
17.2 FIRMVALUEUNDERDIFFERENTCAPITALSTRUCTURES
613
TABLE17.1 TwoFinancingScenariosforaSafe1-YearFirm
Bothscenariosassume:
InvestmentCostinYear0
$200.00
Before-TaxReturninYear1
$280.00
Before-TaxNetReturnfromYear0toYear1
$80.00
CorporateIncomeTaxRate(τ)
30%
AppropriateAverageCostofCapitalfrom0to1
a
12%
ScenarioEF:100%equityfinancing.
TaxableProfitsNextYear
$80.00
CorporateIncomeTaxesNextYear(30%of$80)
$24.00
OwnersWillKeepNextYear
$56.00
ScenarioDF:$200debtfinancingat11%.Therestisleveredequity.
InterestPayments
$22.00
TaxableProfitsNextYear
$58.00
CorporateIncomeTaxesNextYear(30%of$58)
$17.40
EquityOwnersWillKeepNextYear
$40.60
EquityandDebtOwnersWillKeepNextYear
$22.00+$40.60=$62.60
a.AsintheexampleinSection17.1A,inordertoclearitscost-of-capitalhurdlerateof12%,thefirm’sprojects
mustearnarateofreturnof17.14%beforethefirmpaysoutcorporateincometax.Witha30%corporate
incometaxrate,UncleSamwouldconfiscate30%
.
17.14%≈5.14%,fromthefirmitselfandcorporate
investorswouldreceivearateofreturnof12%.
Adebt-financing(DF)scenario:Inthedebt-financingscenario,thefirmborrows
$200todayataninterestrateof11%forinterestpaymentsnextyearof$22.There-
fore,itscorporateprofitswillbe$80−$22=$58,onwhichitwouldhavetopay
UncleSam$17.40.Thispermitsowners(creditorsandshareholders—andaperson
maybeboth)toreceive$62.60,thesumof$22foritscreditorsand$40.60forits
equityholders.
Relativetothe100%equity-financedcase(inwhichownerskeep$56.00),the
debt-financedcase(inwhichownerskeep$62.60)increasesthefirm’safter-taxcash
flowby$6.60.Aquickerwaytocomputethetaxsavingsistomultiplythetaxrateby
theinterestpayments:IftheIRSallowsthefirmtodeduct$22ininterestpayments,
thefirmwillsave$22
.
30%=$6.60incorporateincometaxes.This$6.60intax
savingswilloccurnextyear,anditwillthereforehavetobediscountedback.Itis
common(butnotnecessarilyuniqueorevencorrect)tousethefirm’scostofcapital
todiscountthetaxshelterforagrowingfirm.Thischapter’sappendixexplainsthe
appropriatediscountrateingreaterdetail,butjustrealizethatwhetheryoudiscount
themuchsmallertaxshelterof$6.60bythelowcostofcapitalondebt(11%)orby
ahigherone,say,15%(thefirm’scostofcapital),itwouldonlymakeadifference
of$5.95−$5.74=$0.21.Ona$280expectedcashflow,thisisnotbig,especially
614
CHAPTER17
THEWEIGHTEDCOSTOFCAPITALANDADJUSTEDPRESENTVALUEINANIMPERFECTMARKETWITHTAXES
ANECDOTE
TheRJRBuyoutTaxLoophole
I
n aleveraged buyout(LBO),thefirm’sindebtedness
canincreasedramatically—andthiscan significantly
reducecorporateincometaxes.In 1988,FirstBoston’s
plantotakeoverRJRNabiscoreliedonanesoterictax
loopholejustabouttobeclosed.By“monetizing”itsfood
operations(afancywayto increaseindebtedness),the
deferringoftaxeswouldhavesavedanestimated$3–$4
billionofRJR’scorporateincometaxes—which would
haveincreased theannualfederalU.S. deficitby2%!
Ultimately,FirstBostonlostitsbid,andthisscenariodid
notcomeabout.
comparedtoourotheruncertaintiesinourcashflowestimate,ourCAPMmodeluse,
ourrateofreturnmodelestimate,andsoon.Wearedone:RelativetotheEFcapital
structure,theDFcapitalstructurecreatedjustunder$6inpresentvalue.
solvenow!
Q17.3 A$1millionconstructionprojectisexpectedtoreturn$1.2millionin
1year.Yourcompanyisina45%combinedfederalandstatemarginal
incometaxbracket.
(a)Ifyoufinancetheprojectwithcash,howmuchwillyoupayintaxes?
(b)Ifyoufinancetheprojectwithan$800,000mortgageataninterest
rateof5%,howmuchwillyoupayintaxes?
(c)Iftheappropriateprojectinterestrateis8%,whatisthepresent
valueofthetaxsavingsfromfinancingtheprojectwithamortgage?
17.3 FORMULAICVALUATIONMETHODS:
APVANDWACC
Arethereformulasthatallowyoutocomputethefirmvaluetodaynotonlyforthe
Weneedformulasthatwork
foranyintermediatedebt
ratios.
currentfinancingarrangementbutalsoforotherdebtratiosthatyoumightcontem-
plate?Yes.Thereareessentiallythreemethods.Thissectionexplainstwoofthem,the
APVandWACC:
1. Youcancomputeanadjustedpresentvalue(APV),whichaddsbackthetax
subsidy.(Thisisbasicallythecalculationfromtheprevioussection.)
2. Youcangeneralizetheweightedaveragecostofcapital(WACC)formulato
reflectthepreferentialtreatmentofdebtbysuitablyloweringthecostofdebt
capital.
Thenextsectionexplainsathirdmethodtovaluethetaxbenefits.This“flow-to-
Method#3iscalled“flow-to-
equity.”
equity”methodconstructsthefinancialsforthefirminthenewhypotheticalcapi-
talstructureandthenvaluestheafter-taxcashflowsdirectly. (Withoutdescribing
Valuingafter-taxcash
flows,Section13.3,p.466
itassuch, youhaveactuallyalreadydonethisinChapter13,andyouwill do it
againinChapter20,whereyouwillhavetocreateaproforma.)Properlyapplied,
allthreemethodsshouldprovidesimilar—thoughnotnecessarilytheexactsame—
answers.
Documents you may be interested
Documents you may be interested