Professional Documents
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E D A
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We know that
and also that
The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill
14- 49
M&M Debt Policy Proposition II
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D A A E
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Rearranging
The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill
14- 50
M&M Debt Policy Irrelevance
15 .
000 , 10
500 , 1
securities all of ue market val
income operating expected
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( )
20% or 20 .
10 . 15 .
5000
5000
15 .
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E
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Macbeth continued
Check Prop. II for Macbeth. For 100% equity firm
For 50% equity,
50% debt firm
The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill
14- 51
r
D
E
r
D
r
E
M&M Debt Policy Irrelevance
r
A
Risk free debt Risky debt
The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill
14- 52
M&M Debt Policy Irrelevance
20 0 (%) shares on Return
2 0 ($) share per Earnings
: equity 50%
debt, % 50
15 5 (%) shares on Return
1.50 .50 ($) share per Earnings : equity 100%
$1,500
Income
$500
Operating
Macbeth continued
Leverage increases the risk of Macbeth shares
The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill
14- 53
M&M Debt Policy Irrelevance
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