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## Week 12 notes

by: Laura Notetaker

22

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0

# Week 12 notes Fin 4310

Laura Notetaker
UTEP
GPA 3.77
Managerial Finance
Dr. Oscar Varela

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These are the notes for week 12. This notes cover lecture 9.
COURSE
Managerial Finance
PROF.
Dr. Oscar Varela
TYPE
Class Notes
PAGES
0
WORDS
CONCEPTS
Managerial Finance
KARMA
25 ?

## Popular in Finance

This 0 page Class Notes was uploaded by Laura Notetaker on Saturday November 14, 2015. The Class Notes belongs to Fin 4310 at University of Texas at El Paso taught by Dr. Oscar Varela in Summer 2015. Since its upload, it has received 22 views. For similar materials see Managerial Finance in Finance at University of Texas at El Paso.

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Date Created: 11/14/15
Week 12 Notes Buy low and sell high One way to neutralize the effect of leverage is If you own 10 of rm A 25000 and your return will be 2000 from operating income If you switch to B You will invest 25000 in B and you will invest into stocks and bonds m 125000225000 x 25000 13889 x 12 return 166668 Bonds 100000225000 x 25000 11111 x 5 return 55555 Total 166668 55555 222223 Another way to neutralize the effect of leverage If you switch to B You will invest than 25000 but earn the same return of a 2000 First you need to gure out the WAACB 125000225000 x 12 100000225000 x 5 00667 00222 8889 The amount that you need to invest in order to get the same 2000 in return is 2000 8889 2249972 The value of A will decrease because people will sell it and the value of B will increase because people will buy it Eventually the value of both companies will be the same The capital structure should not affect the value of the rm If you invest in a company that has cheap debt the value of the equity will cost more Even though there is cheap debt the value of equity will upset this opportunity What happens when the levered company is overvalued If B is overvalued Week 12 Notes 1 sell equity and move to A you need to borrow money by selling the bonds and there will be interest in this transaction What happens when there is taxes involved If there is 30 tax rate then the value of each company will go down If the interest is deductible then by using debt the rm will have a higher value Example 100000 in debt 5 in interest 30 tax rate The after tax cost rate 5 1030 35 The total amount of interest is 5000 The tax savings will be 1500 5000 x 30 50 3500 will be paid by you and 1500 will be paid by the government

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