The value of the firm is V = D + E hence if the firm wants to grow it could grow via debt or equity yeah!! debt is cheaper form of financing and equity is expensive yeah!! therefore, trade off theory, kicks in investors wanna be compensated for risk they taking. Key point : In valuing a firm you could use WACC, required rate of return on equity or required rate on debt ( 1-T) yeahh?? WACC = E/V x re + rd x (1-T) x D/V Capm = re = rf+B x MRP NB : Whenever the capital structure of the firm changes that means the Beta changes which is symmetric risk or market risk and investors should get compensated for it since its not firm specific risk. Which means we must adjust beta, unlever the beta to outline that underlying risk and once done then re-lever the beta to get to new CAPM and then calculate the WACC and this WACC is the correct one to use to value the firm since we have taken all risks and adjustments into account. Dr (YEAHHH)
Posted on: Sat, 08 Jun 2013 08:52:41 +0000
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