This spreadsheet supports STUDENT analysis of the case “Capital Structure and Value” (UVA-F-1611).

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Sept. 24, 2013

NAME Animik Saha

Roll No. 23P265
Section PGDME
 Capital Structure and Value
Table 1. Effects of 20% decrease in EBIT on cash flow to equity holders.

No Debt
Base Case 20% Decrease

EBIT 104,000 83,200

Interest - -
Earnings before tax 104,000 83,200
Tax 31,200 24,960
Net income 72,800 58,240

Percentage change in net income -20%

Debt Equal to $380,000

Base Case 20% Decrease

EBIT 104,000 83,200

Interest 22,800 22,800
Earnings before tax 81,200 60,400
Tax 24,360 18,120
Net income 56,840 42,280

Percentage change in net income -26%

quity holders.

The tax rate is 30%

There is a decrease of 20%

interest Rate of 6% on 380,000

30% Tax

26% Decrease
 zd
Table 2. Value of the company using the WACC approach.

No Debt Debt = $380,000

EBIT 104,000 104,000

Tax - -
NOPAT 104,000 104,000
Change in net PPE - -
Change in NWC - -
Free cash flow 104,000 104,000

Unleveraged beta 0.80 0.80

Proportion of debt - 0.38
Debt to equity - 0.61
Leveraged beta 0.80 1.29
Cost of equity (use CAPM) 10.40% 13.10%

WACC 10.40% 10.40%

Enterprise value 1,000,000 1,000,000

Difference in enterprise values -

Calculate ratio of debt to enterprise value 0.38
ing the WACC approach.

Equity Proportion 0.62

 Capital Structure and Value
Table 3. Tax rate equals 30%.

No Debt Debt = $380,000

EBIT 104,000 104,000

Tax 31,200 31,200
NOPAT 72,800 72,800
Change in net PPE - -
Change in NWC - -
Free cash flow 72,800 72,800

Unleveraged beta 0.80 0.80

Proportion of debt - 0.4668
Debt to equity - 0.8756
Leveraged beta 0.80 1.29
Cost of equity (use CAPM) 10.40% 13.10%

WACC 10.40% 8.94%

Enterprise value 700,000 814,000

Difference in enterprise values 114,000

Calculate ratio of debt to enterprise value 0.4668

Cashflow to the government 31200 31200-(3800*0.6)*0.3

Discount rate 10.4 13.1
Value to Govt 300000 186000
Enterprise value
All values
Change In value t government

wealth gets shared to the equity shareholders from GOVT if there Is tax shie
d Value
ls 30%.

Equity Proportion 0.53

ers from GOVT if there Is tax shield

 Capital Structure and Value
Table 4. The sum of the claims will be equal to the enterprise value

No Debt Debt = $380,000

EBIT 104,000 104,000

Interest payments - 22,800
Income before taxes 104,000 81,200
Tax 31,200 24,360
Net income (cash to equity) 72,800 56,840

Cost of equity 10.40% 13.10%

Value of equity 700,000 434,000

Cash to debt (interest) 22,800

Cost of debt 6%
Value of debt 380,000

Enterprise value 700,000 814,000

alue
qual to the enterprise value.
 Capital Structure and Value
Table 5. The sum of the assets equals enterprise value.

No Debt Debt = $380,000

EBIT 104,000 104,000

Tax 31,200 31,200
NOPAT 72,800 72,800
Change in net PPE - -
Change in NWC - -
Free cash flow 72,800 72,800

Beta of operating cash flow

Discount rate 10.40% 10.40%
Value of operations 700,000 700,000

Interest payment 22,800

Annual taxes shield 6,840
Discount rate 6%
Value of tax shield 114,000

Enterprise value 700,000 814,000

alue
enterprise value.
 Capital Structure and Value
Table 6. The asset valuation approach.

No Debt Recapitalized

Free cash flow 72,800 72,800

Discount rate for operations 10.40% 10.40%
Value of operations 700,000 700,000

Value of tax shield (t x D) - 114,000

Enterprise value 700,000 814,000

Debt outstanding - 380,000
Equity value 700,000 434,000

Price without tax shield 35.00

Value of tax shield 114,000

Per share value of tax shield 5.70

Price reflecting both values 40.70

Shares repurchased 9,337

New shares outstanding 29,337
Price postrecapitalization 27.75
alue
pproach.

There are 20,000 outstanding

20,000 shares outstanding initially