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MN50324: Additional Corporate Finance Slides

This presentation provides a comparison of the Modigliani-Miller (MM) and Capital Asset Pricing Model (CAPM) cost of capital equations. It includes a numerical example and explores the implications of changing the cost of capital for a firm.

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MN50324: Additional Corporate Finance Slides

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  1. MN50324:Additional Corporate Finance Slides Comparing MM and CAPM. => MM equations.

  2. Comparison of MM and CAPM Cost of Capital Equations

  3. Numerical Example • Firm X has • Firm wants to change to • Risk free rate = 7%. • Tax rate = 50%, E(Rm) = 17%, Leveraged Beta = 0.5. • What is current WACC? • Current Ke? • What will new Ke and WACC be?

  4. Answer: • Current Ke (CAPM) • Current WACC • Ke.unlevered • New WACC • Firm Value = NCF(1-t)/WACC • Old Value = 100(1-0.5)/WACC = 485 • New Value = 100 (1-0.5)/ WACC = 529 (tax shield)

  5. MM Diagrams K D/E V D/E

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