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As a shareholder
作为股东
*don’t care what the capital structure is?
不关心资本结构是什么？
*only concerned about the expected rate of return
只关注预期收益率
http://www.ukassignment.org/lxszy/
Suppose:-
假设
Total Earning = £100/year Equity Finance = £1000
Expected Rate of Return = RO= (Earning/Value)x100
= (100/1000)x100 = 10%
Capital Structure of Levered Firm = Equity (E) + Loan (L)
Expected Earnings = E (RE) + L (RL)
RE = Cost of Equity (Expected Return on Equity)
RL = Cost of Loan (Interest Rate)
Expected Earning/E+L = E (RE)/E+L + L (RL)/E+L
Rewrite this equation as:- RO = RE (E/E+L) + RL(L/E+L)
RE = RO (E+L/E) – RL(L/E)
Loan = L = £500 = 10%(500+500/500) – 10%(500/500) =10%
Equity = E = £500 = 10%(800+200/800) – 10%(200/800) =10%
Interest Rate = RL = 10% = 10%(200+800/200) – 10%(800/200) =10%
Expected Rate of Return = 10%
Change the composition of equity and loan and check its impact on RE
MM Theory: Proposition II
MM理论：命题II
* Expected return on equity is a linear function of debt-equity ratio in a firm
在一家公司，预期股本回报率是债务权益比率的一个线性函数。
Implies: Higher the debt-equity ratio – Higher would be expected earnings on equity
Rearranging the previous equation
RE = RO + L/E (RO – RL)
If RO = 8%
RL = 10%
Then RE 6% 6.67% 7.5% 8%
Equity = 500 600 800 1000
Loan = 500 400 200 0
RO = Stays constant: means expected return would be maximum if finance through equity
In case of corporation tax
法人税的情况
Suppose:– Equity Financing
Corporation tax = 34%
Total Earnings = £100
Corporation Tax = 100 x 0.34 = £34
Net Earnings = £100 - £34 = £66
Dividend per Share = 66/100 = £0.66
Price per Share = 0.66/0.10 = £6.6
VU = 100 x 6.6 = £660
Suppose:- Debt , Equity Mix Financing
Corporation Tax = 34%
Equity = £500 Loan = £500
Interest rate=10% Interest Payable= (500x0.1)= £50
Total Earnings = £100
Net Earnings= Total Earning – Interest = 100 – 50 = £50
Corporation Tax = 50 x 0.34 = £17
Earnings After Tax = 50 -17 = £33
Dividend per Share = 33/100 = 0.33
Price per Share = 0.33/0.10 = £3.3
VL = Loan + Equity = 500 + (100 x 3.3) = £830
Difference = VL – VU = 830 – 660 = £170
Value of levered firm is £170 higher than un-levered firm
Where £170 come from?
£170来自哪？
Saving from tax
从税中节省
Tax in case of un-levered firm =1000x0.34= £340
Tax in case of levered firm = 500 x 0.34 = £170
Saving from tax = £170
Because of this reason, most of firms like debt financing
It means – more debt more saving and high value of firm
“the value of firm will be maximized if it is financed entirely by debt”
Conclusions: Not very attractive implication
结论：不是非常有吸引力的含义
No firm does that or can not do that due to:
没有公司这样做或不这样做，因为：
Real world constraints:
现实世界的约束条件：
Institutional and legal restrictions
体制和法律限制
Cost imposed for going bankrupt
成本征收破产
Interest tax shield may exhaust taxable income
利息税盾可能会耗尽应纳税所得额
Conflict of interest between shareholders and bondholders
股东和债权人之间的利益冲突
“100% debt policy may not be optimal”
“100％的债务政策可能不是最佳”
“Optimal average debt to value ratio is less than 40%”
“最优平均债务价值比率小于40％
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