TAILIEUCHUNG - Lecture Financial markets - Lecture 11: Corporate equity, debt and taxes

The main contents of this chapter include all of the following: Issues firms face in decided how much to borrow, Modigliani Miller irrelevance theorem, historical changes in leverage, behavioral finance response to extreme version of Modigliani Miller. | Lecture 11: Corporate Equity, Debt and Taxes Leverage Corporate Leverage is measured by Debt D divided by equity E. Highly levered firms court bankruptcy Unlevered firms cannot go bankrupt (Microsoft owned $ billion of other firms’ long-term debt and $ billion in cash and short-term investments in 2000. Xerox Corporation Consolidated Balance Sheet 1999 (in millions) Assets: Cash $126 Receivables $15940 Inventories $2961 Buildings & equipment $2456 Other $7331 Total $28814 Xerox Corporation Consolidated Balance Sheet 1999 Cont. Liabilities Short-term debt $3957 Long-term debt $10994 Deferred taxes $2263 Preferred stock $669 Other $6020 Shareholders equity $4911 Total $28814 Microsoft Balance Sheet 2000 (in $ millions) Assets: Cash & equivalents $4846 Short-term investments $18952 Property & equipment $1611 Equity and debt investments $17726 Other $9015 Total assets $52150 Microsoft Balance Sheet 2000 in $Millions Continued. Liabilities Income taxes $585 Accounts payable $1016 Unearned revenue $4816 Other $4065 Stockholders equity $41368 Total $52150 No debt: no corporate bonds or bank loans! Comparing Market Caps Xerox Market Capitalization = 667 million shares $ = $ billion 2/11/01 (compare with shareholders equity = $.) Microsoft Market Capitalization = billion shares $ = $. (compare with stockholders equity=$) Expected Return on Assets Expected return on assets = rA= weighted cost of capital = expected return on a portfolio consisting of all of a companies liabilities. Value of Firm in Terms of rA Suppose Dividends are constant =Div and debt is perpetual, paying Coupon C. D=C/rD and E=Div/rE Value of firm = V=D+E=C/rD+Div/rE Value of firm = V = (C+Div)/rA rA=weighted average cost of capital = (D/(D+E))rD+(E/(D+E))rE Firm’s Objective: Maximize Overall Market Value V Present Value Model: V=(C+Div)/rA Strategies: Increase C+Div, or lower rate of discount rA. Traditional Position (Before Modigliani-Miller) Both rD and rE are not much affected by the ratio, probability of bankruptcy is so low that it is approximately zero. Since rD

• Tài chính doanh nghiệp
• Financial markets
• Lecture Financial markets
• Economics 252
• Corporate equity
• Modigliani Miller
• Comparing market caps
• Thị trường tài chính
• Financial futures markets
• Valuation of financial futures
• Interest rate futures
• Financial institutions
• Lecture Financial markets and institutions
• Financial institutions markets
• Capital markets
• Money markets
• Derivative securities markets
• Futures markets
• Option markets
• Swap markets
• Foreign exchange derivative markets
• Bank management
• Types of Financial Markets
• Securities traded
• Valuation of securities
• Money market yields
• Bond markets
• Municipal bonds
• Mortgage markets
• Primary mortgage market
• Stock markets
• Common stock
• Foreign exchange markets
• Foreign exchange
• Commercial banks
• Financial statements
• Risks at financial institutions
• Market risk
• Exchange rates
• Efficient markets
• Excess volatility
• Efficient Markets Hypothesis
• Interest rate derivative markets
• Interest rate swaps
• Mortgage backed securities
• Globalization of mortgage markets
• Financial markets and institutions
• The financial system
• Interest rates change
• Financial markets efficient
• Term structure affect interest rates
• The stock market
• The mortgage markets
• The international financial system
• Financial regulation
• Interest rate fundamentals
• Interest rates
• Security valuation