Levered Unlevered

D/E 0.5 0.5 rE = rA 0.14

rD 0.027 0.021 D/E 0
rE ?
rA 0.227 0.221

D/V 0.50 0.50

E/V 1 1
V 1.50 1.50

rE 0.327 0.321
Unlevered firm Levered
outstanding shares 10,172 rD 0.04
Share price 5 D/E 1
Op income 13,914 D/V 0.5
V 1

EPS 1.368 Number of shares 5,086

market value of share 50,860 market value of share 25,430.00
market value of debt 25,430.00
Op income 13,914
Interest 1,017.20
Equity earnings 12,896.80
EPS 2.54
Increase 1.17
Unlevered Levered
D/V 0.429 D/E
E/V 0.571 D/E
B asset 1.9 E
V
B debt 0.2

B equity 4.233333333
0.75
0.75
1
1.75
TC 35%
Tpe 30%
Tp 20%

Relative tax advantage 1.76

D 12,000,000
i 0.03
TC 0.3

PV(tax shield) 3,600,000.00

Unlevered Levered
Tc 0.25 Tc 0.25
D 0 D 30,000,000.00
V 100,000,000.00 V 107,500,000.00
Tax 0.35
Equity change 928
Answer -324.8
Assets Liabilities
Current 423 Debt 258
LT 2,473 Equity 2895
2896 2896

Assets Liabilities
Current 423 Debt 18
LT 2473 Equity 3135
2896 2896

D firm value -84.0

-324.8
-84.00
Assets Liabilities
Current 375 Debt 400
LT 2,388 Equity 2,363 +523
2,763 2,763

change in company value:

tax shield -140
add equity 123
-17

-324.8
-70.7
Tc 0.34 0.34 0.34
TpE 0.5 0.2 0.3
Tp 0.1 0.3 0.4

leverage will add how much value to an unlevered firm per dollar of debt

0.6333333 0.2457143 0.230

return stockh 0.33 0.53

return bondh 0.9 0.7
0.6333333 0.2457143

right answer: 0.172

E/V 1 D/V 0.5
rE 0.2 rD 0.023
price 60 $
EPS 12 $

rA 0.2 rA = D/V * rD + E/V * rE

rE 0.377 0.377

wrong: EPS1 = Earnings/NOS1

EPS2 = Earnings/NOS2
EPS1*NOS1 = EPS2*NOS2
EPS2 = EPS1*NOS1/NOS2
EPS2 24
Tc 0.34
Tp 0.3
TpE 0.2

operating income 1 1
bondholders shareholders
corporate tax 0 0.34
personal tax 0.3 0.132
income investor after tax 0.7 0.528 0.528
ADVANTAGE 0.172

relative tax advantage of debt 1.325757576

0.754285714 0.245714286
 BOOK:
unlevered: levered: levered:
E/V 1 D/V 0.25 E/V 1
rE 0.15 rD 0.06 rE 0.125
price 40 $/share price 50
EPS 6 $/share EPS
P/E 8
P/E 6.6666667 $/share rA 0.15 P/E calc 8
E/V 0.75
rE 0.18
price 40 $
P/E = 1/rE P/E 5.5555556 $
rE = E/P
rE = EPS/PPS
EPS = rE*PPS 6 EPS 7.20
 unlevered:
D/V 0.5
rD 0.05
$
$
$
rA 0.125
E/V 0.5
rE 0.2
price 50 $
P/E 5$
unlevered levered
rE 0.2 D/V 0.5
price per share 60 rD 0.021
EPS 12
12 rA 0.2
E/V 0.5
rE 0.379

price 60.00
EPS 22.74
unlevered levered
rE 0.2 D/V 0.5
price 60 rD 0.08
EPS 12
rA 0.2 rE 0.32

new:
rE = EPS/PPS price 60
EPS = rE*PPS 12 EPS 19.2

shares old 100

earnings 1200

shares new 50
earnings 960

delta 240
FV bond 3000 EQUAL TO 50 shares * price
3000