# Finance Capital structure : Calculation of Sum of values of pure business flows by ClassOf1

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```									              Sub: Finanace                                                                     Topic: Capital Structure

Question:
Calculation of Sum of values of pure business flows and financing effect

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In the preceding problem, we divided the value of all the assets between two classes of
investors: creditors and shareholders. This process tells us where the change in value is going,
but it sheds little light on where the change is coming from. Let’s divide the free cash flows of
the firm into pure business flows and cash flows resulting from financing effects. Now, an axiom
in finance is that you should discount cash flows at a rate consistent with the risk of those cash
flows. Pure business flows should be discounted at the unlevered cost of equity (i.e., the cost of
capital for the unlevered firm). Financing flows should be discounted at the rate of return
required by the providers of debt.

0%                25%               50%
Debt/100          Debt/75%          Debt/50%
Equity            Equity            Equity