AN INTRODUCTION TO

DEBT AND VALUE

SYNDICATE 4 – YP 60A
AULIA AKBAR AKMAL
29118429
HENNI RAHMAN 29118380
YOGA ADITIA N 29118441
 0% Debt/ 25% Debt/ 50% Debt/
100%
  Equity 75% Equity 50% Equity
Book value of debt 0 $ 2.500 $ 5.000
Book value of equity $ 10.000 $ 7.500 $ 5.000
Market value of debt
Market value of
0 $ 2.500 $ 5.000 QUESTION 1
equity $ 10.000 $ 8.350 $ 6.700
Pre-tax cost of debt
After-tax cost of
0,05 0,05 0,05 • Why does the value
debt
Market value
0,033 0,033 0,033 of assets change?
weights of
Debt
 
0
 
0,23 0,43
  Where, specifically,
Equity
Levered beta
1
0,8
0,77
0,96
0,57
1,19
do those changes
Risk-free rate
Market premium
0,05
0,06
0,05
0,06
0,05
0,06
occur?
Cost of equity 0,098 0,11 0,12
WACC 0,098 0,090 0,084  The value of assets
EBIT
-Taxes (34%)
$
$
1.485,00 $ 1.485,00
504,90 $ 504,90
$ 1.485,00
$ 504,90
change because
EBIAT $ 980,10 $ 980,10 $ 980,10
$
+Depreciation
500 $ 500 $ 500
$
-Capital expense
(500) $ (500) $ (500)
Change in NWC 0 0 0
Free cash flow 980,1 980,1 980,1
Value of Asset $ 10.001,02 $ 10.851,11 $ 11.701,19
 0% Debt/ 25% Debt/ 50% Debt/
 
100% Equity 75% Equity 50% Equity

QUESTION 2 Cash flow to creditors :

Interest
 
0
 
125
 
250
Pretax cost of debt 0,05 0,05 0,05
Value of debt :      
• As the firm levers up, how (Interest/kd) 0 $ 2.500 $ 5.000
does the increase in value Cash flow to shareholders      
get apportioned between EBIT $ 1.485 $ 1.485 $ 1.485
the creditors and the -Interest 0
$ $
(125) (250)
shareholders?
Pretax profit $ 1.485 $ 1.360 $ 1.235
Taxes (34%) $ 505 $ 462 $ 420
His assets increased in view
Net income $ 980 $ 898 $ 815
of residual cash flows which
+Depreciation $ 500 $ 500 $ 500
depreciation + capital
-Capital expense $ (500) $ (500) $ (500)
expense + change in net
+Change in NWC 0 0 0
working capital + debt
-Debt Amortization 0 0 0
amortization
Residual Cash Flow (RCF) $ 980,10 $ 897,60 $ 815,10
Cost of equity 0,10 0,11 0,12
Value of equity $ 10.001,02 $ 8.350,93 $ 6.700,82
Value of equity plus value
$ 10.001,02 $ 10.850,93 $ 11.700,82
of debt
 0% Debt/ 25% Debt/ 50% Debt/
100% Equity 75% Equity 50% Equity
Pure business cash flows :
EBIT $ 1.485 $ 1.485 $ 1.485
Taxes (@34%) $ (505) $ (505) $ (505)
EBIAT $ 980 $ 980 $ 980
+Depreciation $ 500 $ 500 $ 500
-Capital expense $ (500) $ (500) $ (500)
QUESTION +Change in NWC 0 0 0

3
Free cash flow (FCF) $ 980 $ 980 $ 980
Unlevered beta 0,8 0,8 0,8
Risk-free rate 0,05 0,05 0,05
Market premium 0,06 0,06 0,06
Unlevered WACC 0,098 0,098 0,098
Value of pure business flows :
$ 10.000 $ 10.000 $ 10.000
(FCF/Unlevered WACC)
Financing cash flows
Interest 0 $ 125 $ 250
Tax reduction 0 $ 83 $ 165
Pretax cost of debt 0,05 0,05 0,05
Value of financing effect :
$ - $ 1.650 $ 3.300
(Tax reduction/Pretax cost of debt)
Total Value (Sum of vales of pure
$ 10.000 $ 11.650 $ 13.300
business flows and financing effects)
 0% Debt/ 25% Debt/ 50% Debt/
 
100% Equity 75% Equity 50% Equity

Total Market Value of Equity $ 10.000 $ 8.350 $ 6.700

QUESTION 4
$ -
Cash Paid Out $ 2.500 $ 5.000

Number of Original Shares $ 1.000 $ 1.000 $ 1.000

Total Value Per Share 10 10,85 11,7

QUESTION 5

• In this set of problems, is leverage good for shareholders? Why?

Yes, because the firm with high leverage may earn higher returns on average
than with less average. Also can be seen in the previous calculation, where
increase in total value per share will be good for shareholders
Is levering/ unlevering the firm something that shareholders can do for
themselves?
No, The control of the firms managers. They can either increase or decrease
leverage by adopting strategies
In what sense should shareholders pay a premium for shares of levered
companies?
The debt is able to increase the share value above the par value of company
QUESTION 6

• From a macroeconomic point of view, is society better off if

firms use more than zero debt (up to some prudent limit)?
Debt tax shield benefits of leverage arise from a wealth
transfer from the public sector to the private sector. Society is
truly better off if the levering or unlevering of the firm makes
other things happen - for example, if it motivates managers to
continuously find a new expansion project that can gives
positive impact for the economy (through the project's
multiplier effect).
 Before After
Changes
  Recapitalization Recapitalization
       
Book-Value Balance Sheets      

Net Working Capital 212.453,00 212.453,00  

Fixed Assets 601.446,00 601.446,00  

Total Assets 813.899,00 813.899,00  

       

Long-Term Debt 172.409,00 1.738.095,00 1.565.686,00

Deferred taxes, etc. 195.616,00 195.616,00  

QUESTION
Preferred Stock 15.000,00 15.000,00  

Common Equity 430.874,00 (1.134.812,00) (1.565.686,00)

7 Total Capital
 
Market-Value Balance Sheets
813.899,00
 
 
813.899,00
 
 
 
 
 

Net Working Capital 212.453,00 212.453,00  

Fixed Assets 1.618.081,00 1.618.081,00  

Present Value of Debt Tax Shield 58.619,00 590.952,30 532.333,30

Total Assets 1.889.153,00 2.421.486,30  

       

Long-Term Debt 172.409,00 1.738.095,00 1.565.686,00

Deferred taxes, etc. - -  

Preferred Stock 15.000,00 15.000,00  

Common Equity 1.701.744,00 668.391,30 (1.033.352,70)

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