Coporate Finance Case Study
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Case Study corporate finance
Case 28 – An Introduction to Debt Policy and Value
Case 30 – MCI Communications, Corp.: Capital Structure Theory
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Table of Contents
Case 28 - An Introduction to Debt Policy and Value 3
Effects of Debt on the Value of the Firm 3
Split of Value between Creditors and Shareholders 4
Source of Value Creation 4
Effects on Value per Share 5
The Benefits of Leveraging for the Shareholders 6
The Macroeconomic Benefit of Debts 7
Koppers Company, Inc. 7
Case 30 – MCI Communications, Corp.: Capital Structure Theory 9
Introduction 9
Cost of Capital 9
Costs of Equity 9
Cost of Debt 10
WACC 10
Scenario Analysis 11
Leverage and Risk – Coverage Ratio 11
Leverage and Earnings – Earnings per Share 12
The Creditor’s Reaction 14
Impact on Financial Flexibility 15
Summary and Concluding Remarks 16
Literature 17
Case 28 - An Introduction to Debt Policy and Value
The following case is about the management of the corporate capital structure. In this context, we deal particularly with the questions on debt policy and value.
Effects of Debt on the Value of the Firm
Borrowing for itself does not create any value. However, borrowing might influence the capital structure of a firm in a way that changes the weighted average costs of capital (WACC) which consequently has effects to the value of the firm, too. However, in reality whether this statement is true or wrong is not only depended on various individual circumstances (e.g. tax rate, risk factors, financial market access, types of assets, etc.) but is also subject to controversial discussions among both theorist and practitioners. Financial theorists argue that in a world with no bankruptcy costs but with corporate taxes, the firm value is an increasing function of leverage (Ross, Westerfield and Jaffe,
Case Study corporate finance
Case 28 – An Introduction to Debt Policy and Value
Case 30 – MCI Communications, Corp.: Capital Structure Theory
___________________________________________________________________
Table of Contents
Case 28 - An Introduction to Debt Policy and Value 3
Effects of Debt on the Value of the Firm 3
Split of Value between Creditors and Shareholders 4
Source of Value Creation 4
Effects on Value per Share 5
The Benefits of Leveraging for the Shareholders 6
The Macroeconomic Benefit of Debts 7
Koppers Company, Inc. 7
Case 30 – MCI Communications, Corp.: Capital Structure Theory 9
Introduction 9
Cost of Capital 9
Costs of Equity 9
Cost of Debt 10
WACC 10
Scenario Analysis 11
Leverage and Risk – Coverage Ratio 11
Leverage and Earnings – Earnings per Share 12
The Creditor’s Reaction 14
Impact on Financial Flexibility 15
Summary and Concluding Remarks 16
Literature 17
Case 28 - An Introduction to Debt Policy and Value
The following case is about the management of the corporate capital structure. In this context, we deal particularly with the questions on debt policy and value.
Effects of Debt on the Value of the Firm
Borrowing for itself does not create any value. However, borrowing might influence the capital structure of a firm in a way that changes the weighted average costs of capital (WACC) which consequently has effects to the value of the firm, too. However, in reality whether this statement is true or wrong is not only depended on various individual circumstances (e.g. tax rate, risk factors, financial market access, types of assets, etc.) but is also subject to controversial discussions among both theorist and practitioners. Financial theorists argue that in a world with no bankruptcy costs but with corporate taxes, the firm value is an increasing function of leverage (Ross, Westerfield and Jaffe,