VALUATION & CAPITAL StevcTURE explanation] deGni tion of variables fen mnology used for this Sample “Problen, Mem Modligitani Miller financial Moclef @2 Companies + A kB —- these designatins Used in Subscript When caleulaticy Cost 3F capital SOWCeS E Values for each fian. @ t,t cost of eauity, Arg cost oF debt. 6 T: tav rete. © D+ debt. Gy "4 2Quity: & Vi value. (3) WACC: Weighteel Average Gist of Cpital - d) Y= D+E Ci) Taw benefit of debt is what adds value; his added-value = (T)*(D)- Cid) EBIT' Earnings Before Dinter Caves. i) Present Yolwe. oF perpetual cash flor on afer ru basis: V= EBrr(1-T) mand a firm is dekt-Free Whee Gey [0% eBuity) then (sats reunded. te ta WACC = Ve Sbgpticnet ches nal placesoh Fiems ‘ A xp Same ~ aR class *4 EBIT = COCO A - No clebt 5 f,s12% (tty Goat) aw , © 1, eet fay = 9% Compute Values for A *® B, cost ee fas By * wace fr A*X B. ( onswis) \) Use Ux M aud @5shme 32%, tay rote °) . ten = ée0000 (0.68) -[*,400, o00| A Vea ONZ Ve = Vg + TD = obewe + (0.32X1,000,000) =('3720 000 @ A - [00% a . es vos, = WACC = (12% | Calyeody g Jen) ) tage lon + (lea CI-1) Sm) = 2% +(z%-39 9%)(0« eam) = 12% + 0.15 % D+E,= Ve = fiein%] “yon + Ey= §aqn0000 (3) LaAcc y= (04, )ra(leT)+ €,) leg (ne) ce a(n “Grs)6 % + ey “ = (0.97 | al 322,120,000