An Introduction to Debt Policy and Value

5 Pages Posted: 21 Oct 2008 Last revised: 22 Jan 2019

See all articles by Robert F. Bruner

Robert F. Bruner

University of Virginia - Darden School of Business

Sean Carr

University of Virginia - Darden School of Business

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Abstract

This exercise consists of a set of incomplete worksheets with which students must calculate (1) the effect of hypothetical changes in capital structure on firm value, and (2) the effect of a major recapitalization on the share price of Koppers Company. Illustrating in particular Modigliani and Miller's theory about the relationship between debt and firm value in a taxable world, this exercise lays important conceptual foundations in the area of firm valuation and sketches the three classic approaches to valuing the firm.

Excerpt

UVA-F-0811

Rev. Jan. 4, 2019

An Introduction to Debt Policy and Value

Many factors determine how much debt a firm takes on. Chief among them ought to be the effect of the debt on the value of the firm. Does borrowing create value? If so, for whom? If not, then why do so many executives concern themselves with leverage?

If leverage affects value, then it should cause changes in either the discount rate of the firm (that is, its weighted-average cost of capital) or the cash flows of the firm.

1. Please fill in the following:

. . .

Keywords: debt policy, financial policy, leverage, liability management, tax issues, Modigliani and Miller, firm valuation, debt tax shields, value additivity

Suggested Citation

Bruner, Robert F. and Carr, Sean, An Introduction to Debt Policy and Value. Darden Case No. UVA-F-0811, Available at SSRN: https://ssrn.com/abstract=909063

Robert F. Bruner (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-3823 (Phone)
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HOME PAGE: http://faculty.darden.edu/brunerb/

Sean Carr

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4812 (Phone)

HOME PAGE: http://www.batteninstitute.org

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