335121192.

xlsx
Sales Price
Variable Cost per Unit
Fixed Costs
Breakeven Point

Total Assets
Debt
Equity
Cost of Debt
Tax Rate

EBIT
Interest Exp.
EBT
Taxes
Net Income
Basic Earning Power
ROIC
ROE
TIE

20.00%
15.00%
ROE 10.00%
5.00%
0.00%
2,000

15
10
200
40 units
Firm U
20,000
0
20,000
12%
40%

Firm L
20,000
10,000
10,000
12%
40%

4,000
0
4,000
1,600
2,400

2,000
1,200
800
320
480

Firm L
3,000
1,200
1,800
720
1,080

4,000
1,200
2,800
1,120
1,680

10.00%
15.00%
20.00%
6.00%
9.00%
12.00%
6.00%
9.00%
12.00%
Undefined Undefined Undefined

10.00%
6.00%
4.80%
1.67

15.00%
9.00%
10.80%
2.50

20.00%
12.00%
16.80%
3.33

2,000
0
2,000
800
1,200

Firm U
3,000
0
3,000
1,200
1,800

ROE vs. EBIT

Firm U

2,500

3,000

3,500

Timothy R. Mayes, Ph.D.:

Note that the firm pays out all
earnings, so they are not growing.
Therefore FCF = NOPAT = EBIT(1t). Also, using the FCF valuation
model with g = 0 results in V =
FCF/WACC.

4,000

EBIT

% Debt
0%
20%

Pre-tax Kd

30%
40%
50%
Stock Price
Shares Outstanding
EBIT
Beta
Tax Rate
Risk-free Rate
Market Risk Premium

Kc

Pizza Palace Capital Structure

VF
WACC

8%

Beta
1.00
1.15

12.00%
12.90%

9%

1.26

13.54%

10%
12%

1.40
1.60

14.40%
15.60%

25
10,000,000
50,000,000
1.00
40%
6%
6%

12.00% 250,000,000
11.28% 265,957,447

Vd

VC

0
53,191,489

250,000,000
212,765,957

11.01% 272,479,564 81,743,869 190,735,695

11.04% 271,739,130
11.40% 263,157,895

Hamada's Equation:
_=_ [1+/
(1)]

108,695,652
131,578,947

163,043,478
131,578,947

Stock Price Shares After

25.00
10,000,000
26.60
8,000,000

27.25

7,000,000

27.17
26.32

6,000,000
5,000,000

Timothy R. Mayes, Ph.D.:

Note that the Value of Equity is Value of
Firm - Value of Debt. The debt is used to
repurchase stock, so the stock price will
rise as soon as the debt issue is
announced.
So, before the repurchase the Value of
Equity is equal to the Value of the Firm Value of Debt + (Debt Issued - Initial
Debt). Because Initial Debt is 0, the stock
price is Value of Firm/100,000 shares.

10/28/2016

335121192.xlsx
A20:

Timothy R. Mayes, Ph.D.:

A21:

Timothy R. Mayes, Ph.D.:

A23:

Timothy R. Mayes, Ph.D.:

F35:

Timothy R. Mayes, Ph.D.:

Basic Earning Power is defined as EBIT/Total Assets, it is also known as the operating income return on assets.

ROI is the return on investment (AKA: ROA) and is normally defined as Net Income/Total Assets. In capital structure theory, we add back the interest expense to
net income in the numerator, thus we are really calculating the Net Operating Profit After Tax/Total Assets.

Times Interest Earned is calculated by EBIT/Interest Expense and is a measure of the ability of the firm to pay its financing costs.

Note that the firm pays out all earnings, so they are not growing. Therefore FCF = NOPAT = EBIT(1-t). Also, using the FCF valuation model with g
= 0 results in V = FCF/WACC.

I35:

Timothy R. Mayes, Ph.D.:

Note that the Value of Equity is Value of Firm - Value of Debt. The debt is used to repurchase stock, so the stock price will rise as soon as the
debt issue is announced.
So, before the repurchase the Value of Equity is equal to the Value of the Firm - Value of Debt + (Debt Issued - Initial Debt). Because Initial Debt
is 0, the stock price is Value of Firm/100,000 shares.

J35:

Timothy R. Mayes, Ph.D.:

This is the number of shares after the repurchase. Since the debt will be used to purchase stock at the new stock price, the number of shares
repurchased is Debt Issued/New Stock Price. The new number of shares is then the original shares (100,000) less the number repurchased.

10/28/2016