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【正文】 . Corporate Taxes 9 Example You own all the equity of Space Babies Diaper Co.. The pany has no debt. The pany’s annual cash flow is $1,000, before interest and taxes. The corporate tax rate is 40%. You have the option to exchange 1/2 of your equity position for 10% bonds with a face value of $1,000. Should you do this and why? . Corporate Taxes 10 Example You own all the equity of Space Babies Diaper Co.. The pany has no debt. The pany’s annual cash flow is $1,000, before interest and taxes. The corporate tax rate is 40%. You have the option to exchange 1/2 of your equity position for 10% bonds with a face value of $1,000. Should you do this and why? All Equity 1/2 Debt EBIT 1,000 Interest Pmt 0 Pretax Ine 1,000 Taxes 40% 400 Net Cash Flow $600 . Corporate Taxes 11 All Equity 1/2 Debt EBIT 1,000 1,000 Interest Pmt 0 100 Pretax Ine 1,000 900 Taxes 40% 400 360 Net Cash Flow $600 $540 Example You own all the equity of Space Babies Diaper Co.. The pany has no debt. The pany’s annual cash flow is $1,000, before interest and taxes. The corporate tax rate is 40%. You have the option to exchange 1/2 of your equity position for 10% bonds with a face value of $1,000. Should you do this and why? . Corporate Taxes 12 . Corporate Taxes All Equity 1/2 Debt EBIT 1,000 1,000 Interest Pmt 0 100 Pretax Ine 1,000 900 Taxes 40% 400 360 Net Cash Flow $600 $540 Total Cash Flow All Equity = 600 *1/2 Debt = 640 (540 + 100) Example You own all the equity of Space Babies Diaper Co.. The pany has no debt. The pany’s annual cash flow is $1,000, before interest and taxes. The corporate tax rate is 40%. You have the option to exchange 1/2 of your equity position for 10% bonds with a face value of $1,000. Should you do this and why? 13 Capital Structure PV of Tax Shield = (assume perpetuity) D x rD x Tc rD = D x Tc 14 Capital Structure PV of Tax Shield = (assume perpetuity) D x rD x Tc rD = D x Tc Example: Tax benefit = 1000 x (.10) x (.40) = $40 15 Capital Structure PV of Tax Shield = (assume perpetuity) D x rD x Tc rD = D x Tc Example: Tax benefit = 1000 x (.10) x (.40) = $40 PV of 40 perpetuity = 40 / .10 = $400 16 Capital Structure PV of Tax Shield = (assume perpetuity) D x rD x Tc rD = D x Tc Example: Tax benefit = 1000 x (.10) x (.40) = $40 PV of 40 perpetuity = 40 / .10 = $400 PV Tax Shield = D x Tc = 1000 x .4 = $400 17 Capital Structure Firm Value = Value of All Equity Firm + PV Tax Shield 18 Capital Structure Firm Value = Value of All Equity Firm + PV Tax Shield Example All Equity Value = 600 / .10 = 6,000 19 Capital Structure Firm Value =
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