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Week 13 notes

by: Laura Notetaker

Week 13 notes Fin 4310

Laura Notetaker
GPA 3.77
Managerial Finance
Dr. Oscar Varela

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About this Document

These are the notes for week 13
Managerial Finance
Dr. Oscar Varela
Class Notes
Managerial Finance
25 ?




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This 2 page Class Notes was uploaded by Laura Notetaker on Sunday November 22, 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 28 views. For similar materials see Managerial Finance in Finance at University of Texas at El Paso.


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Date Created: 11/22/15
Week 13 notes Cost of equityb cost of equitya cost of equitya interest Bondsvalue of stock WACC would be the same if both companies are worth the same in terms of net operating income If rm A has 30 tax Net income 20000 So the tax is 6000 This will result in 14000 after tax If there is a cost of equity of 8 175000 is the value of rm A 140008 The value of A fails because of the tax in equilibrium the value falls 30 lf rm B has 10000 in debt 5 in interest 5000 If there is a 5000 taxable income and a 30 interest rate then 1500 would be in taxes This causes to save 1500 in taxes with debt If the 5000 taxable income minus the 5000 of interest that results in 0 tax deductible 5000 is the interest payment can be divided into two parts 3500 capitalized at 5 interest rate is 70000 1500 capitalized at 5 interest rate government subsidy is 30000 Firm B39s value 175000 30000 205000 in equilibrium The value of the levered rm value of the unlevered rm tax x value of B Week 13 notes 20 yrs gt 80 yrs At a 6 interest rate FV1000000 6 N40 PMT 646153 FV1000000 612 N 480 PMT 50214 per month PV1000000 N240 612 PMT 716431 per month Example D1 1 k9 g4 earnings16667 Po 1 00900420 value of the stock Retention rate 1667 1 16667 40 If ROE 10 and the retention rate 40 10 x 40 4 If the ROE changes to 8 8 x 40 32 Cash cow 16667009 0 18518 The difference is due to the difference in the ROE Po1 009 0032 1724 there was a change in the growth rate


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