Finance Capital structure : Effect of leverage on creditors by ClassOf1

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Effect of leverage on creditors and share holders. : In finance, as in accounting, the two sides of the balance sheet must be equal. In the previous problem, we valued the asset side of the balance sheet.

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									              Sub: Finance                                                                      Topic: Capital Structure



              Question:
              Effect of leverage on creditors and share holders.

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              In finance, as in accounting, the two sides of the balance sheet must be equal. In the previous
              problem, we valued the asset side of the balance sheet. To value the other side, we must value
              the debt and the equity, and then add them together.



                                                               0% Debt/              25%                50%
                                                                100%               Debt/75%           Debt/50%
                                                                Equity              Equity             Equity
               Cash flow to creditors:
               Interest                                                    0               $125                $250
               Pretax cost of debt                                      0.05                0.05                0.05
               Value of debt:
                           (Interest/kd)                                     -                   -                  -
								
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