oops!
it’s there
Effective Tax Rate = Corp Rate + (1-Corp Rate)(Individual Rate) Expected Dividend = Previous Div + [(expected increase in EPS)(Target Payout Ratio)(Adjustment Factor)] where Adjustment Factor = 1/Number of years over which adjustment takes place Post Merger Value of Acquiror: V of Acquiror + Value Target + Synergies - Cash or Comp paid Gains to Target: Takeover Premium = Cash or Comp to target - Pre-Merger Target Value Gains to Acquiror: Synergies - Takover Premium = Synergies - (Cash or Comp to target - Pre-Merger Target Value)
Swaption: What is the “SR” in Business Risk=SR+ Operating risk?
rellison Wrote: ------------------------------------------------------- > Swaption: What is the “SR” in Business Risk=SR+ > Operating risk? Sales Risk
Sales Risk
Also, a trick I learned for valuing mergers is that Pt=C for cash payments and that Pat=Vat/(#new shares issued+total existing shares) for stock payments. You can find Pt=NPat using this formula for Pat. You do less thinking and more plugging in when you’re valuing this way.
You know they will test us on a couple of the Corporate Governance sections…“Does this reflect sound corporate governance?”
Munn Industrial Components currently finances its operations with 100% equity, but is considering changing its target capital structure to 70% equity and 30% debt. Munn has a large asset base, a 20% operating profit margin, and the average interest rate on debt is expected to be 6.0%. If Munn makes the change to its capital structure and EBIT is unchanged, what is most likely the impact on Munn’s net income and return on equity (ROE) respectively? Impact on Net Income Impact on Return on Equity A) No Change Increase B) Decrease Decrease C) Decrease Increase
NI Decrease - bcos of the Interest expense. Equity Decreases from 100% to 70%, and NI also decreases. So ROE decreases B?
I need to back off the q’s. No need to straddle the copyrite line again. You should be able to figure out this question with logic (without having to use calculations). The interest expense associated with using debt represents a fixed cost that reduces net income. However, the lower net income value is spread over a smaller base of equity capital, serving to increase the ROE. If a firm is financed with 100% equity, there is a direct relationship between changes in the firm’s ROE and changes in operating income. Adding financial leverage (debt) to the firm’s capital structure will cause ROE to become much more volatile and ROE will change more rapidly for a given change in operating income. The increased volatility in ROE reflects an increase in both risk and potential return for equity holders. Note that financial leverage results in increased default risk, but since existing bond holders are compensated by coupon interest and return of principal, their potential return is unchanged. Although financial leverage will generally increase ROE if a firm has a positive operating margin (EBIT/Sales), if the operating margin were small, the added interest expense could turn the firm’s net profit margin negative, which would in turn make ROE negative.
C? NI does decrease, but the impact of a decreasein equity in the denominator more than offsets the decrease in NI, which increases ROE.
NI will typically decrease due to additional interest needing to be paid when leverage increases. ROE will increase regardless since the return on equity is magnified by the d/e ratio aka leverage multiplier from the dupont level 1 topic. But, an increase in ROE does not increase NI.
I don’t think you can answer this question without some real numbers like Asset size and Sales. Scenario 1 - 50 million in EBITDA @ 100% Equity: EBIT 50 INT 0 NI 30 ROE 3.0% ASSETS 1000 EQUITY 1000 DEBT 0 Scenario 1A - 50 million in EBITDA @ 70/30 Debt-to-Equity: EBIT 50 INT 18 NI 19.2 ROE 2.7% GOES DOWN ASSETS 1000 EQUITY 700 DEBT 300 Scenario 2 - 100 million in EBITDA @ 100 Equity: EBIT 100 INT 0 NI 60 ROE 6.0% ASSETS 1000 EQUITY 1000 DEBT 0 Scenario 2 - 100 million in EBITDA @ 70/30 Debt-to-Equity: EBIT 100 INT 18 NI 49.2 ROE 7.0% GOES UP ASSETS 1000 EQUITY 700 DEBT 300
I’d go with B NI decreases because you are adding an interest expense, taxes will come down on an absolute basis but total below the line costs increase Return on equity should also decrease. The change in capital structure is not a shift of equity to debt - when you take on debt you increase cash. Total equity shouldn’t change so you have lower NI on the same base - lower ROE 100% equity Assets (1000) = Debt (0) + Equity (1000) 70% equity Assets (1430) = Debt (430) + Equity (1000)
You have to account for the fact that equity reduces; in your above 2 equations, you’ve kept equity constant at 1000. The total capitalization of the company stays the same, just the ratio of debt to equity changes. So even assets will stay the same (1000) and equity will be 570 (1000-430).
It doesn’t say the total capitalization of the company stays the same, it says it is changing its capital structure. The enterprise value does remain constant though which I think is what you meant. If I own a business and it is fully financed by equity and I change my target structure to include debt I don’t just move my equity to debt. I make offsetting adjustments to debt and assets. I take a loan which adds debt (and cash) you made the same point, there is no reason for equity to change, just the ratio of debt to equity changes.