This note presents a series of questions that lead students to a significant connection logic of capital structure and firm value. It begins with a non-tax test, then flows through the assessment of tax deductions on the basis of (1) a discount rate of any tax effects built in (discount free cash flow in the WACC), (2) evaluation of specific requirements (cost of equity cash flow and debt cash flows separately), and (3) an estimate of cash flows (assets and shields to tax separately). In conclusion, note the relationship of these concepts share price effects around recapitalization. Financial risk (leverage on CAPM beta) are also introduced and illustrated. "Hide
Mark Lipson on 8 pages. Publication Date: December 21, 2009. Prod. #: UV3929-PDF-ENG
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