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MM propositions
V=E+D
WACC
rD
D
V
Financial management: lecture 10
M&M (Debt Policy Doesn’t Matter)
Example - River Cruises - All Equity Financed
Data
Number of shares 100,000
Price per share $10
Market Value of Shares $ 1 million
PV of Tax Shield =
D x rD x Tc
= D x Tc
rD
Example:
Tax benefit = 1000 x (.10) x (.40) = $40
PV of 40 perpetuity = 40 / .10 = $400
PV Tax Shield = D x Tc = 1000 x .4 = $400
Costs of
Market Value of The Firm
financial distress
PV of interest
tax shields
Value of levered firm
Value of
unlevered
firm
Optimal amount
of debt
Debt
Financial management: lecture 10