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- 2011-7-11
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3#
发表于 2011-7-13 15:25
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Kind of...but easier to remember like this:
In Prop I, you are concerned with VALUE
In Prop II, you are concerned with WACC
MM without tax:
I: VALUE is does not change cause capital structure is irrelevant
II: WACC does not change cause...(cost of equity increases proportionally as amount of Debt in capital structure increases. So WACC does not change as capital structure changes since the benefit of using debt at a lower rate is offset by the increase in the cost of equity due to more debt in cap structure)
MM with tax:
I: VALUE DOES change because of the tax shield of debt. Value is MAXIMIZED when Debt = 100% of capital structure
II: WACC DOES change because of the tax shield of debt. WACC is MINIMIZED when Debt = 100% of capital structure
Static Tradeoff:
If you factor in the costs of financial distress, there is an optimal structure such that WACC is minimized and VALUE is maximized. This occurs when the marginal benefit of debt = marginal cost of financial distress. So 100% debt is not optimal, cause financial distress costs increase as your Debt level increases - and eventually, the benefit of the tax shield will be offset by the fin distress costs. So there is a "tradeoff" |
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