KU CHEESE CO. FOR POSTLOSS REINVESTMENT
& POSTLOSS FINANCING
- KU did have constant annual earnings of $2MM.
- It initially had
$2MM of Debt at 10% of cost of debt (kD) and
500,000 shares of equity (i.e. stocks).
- Assumed the cost of equity (kE) at 15%.
- Now, it suffers a loss of plant by fire, costing $2MM, and
this loss results in reduced earnings down to $1MM
(from the pre-loss level of $2MM).
- The loss also affects the cost of equity, rising to 17%.
QUESTION
Q.1 "Should reinvestment, in order to restore pre-loss
level of earnings of $2MM, be undertaken?
Q.2 "If YES to the above reinvestment after loss, what
type of financing between Equity and Debt should
be secured?"
NPV = -2MM + 1MM/(1+r) + 1MM/(1+r) 2 + … ∞
S = 1 + x + x2 + x3 + … ∞
= 1 / (1-x)
NPV = -2MM + 1MM/(1+r) + 1MM/(1+r) 2 + … ∞
= -2MM + 1MM/(1+r) [1 + 1/(1+r) + 1/(1+r) 2 + … ∞]
= -2MM + 1MM/(1+r) [1/[1-1/(1+r)] ]
= -2MM + 1MM / r
IRR = ?
= 0
1/2 or 50%
자 본 조 달 (계속)
- MVE (M.V. of Equity) 자기자본가치
2
1
t=0
3
…
…
E
E
E
MVE =
+
+
+  ( )
(1 + k ) (1 + k )
(1 + k )
1
3
2
2
E
E 를 가정했을 때,

E
E
MVE = 
=
i
kE
i =1 (1 + k E )
E
3
E
ANSWER SHEET
EARNING (EN)
LOSS OF EARNINGS
EARNINGS BEFORE INTEREST
& TAX
(EBIT)
INTEREST PAYMENT
TAX
EARNINGS AVAILABLE FOR
DISTRIBUTION (E)
NUMBER OF SHARES
(m)
EARNINGS PER SHARE
(EPS = E / m)
COST OF EQUITY (KE)
PRICE PER SHARE
(EPS / KE)
MARKET VALUE OF EQUITY
(MVE = E / KE)
MARKET VALUE OF FIRM
(MVF = MVE + MVD)
WEIGHTED AVERAGE COST
OF CAPITAL (WACC)
Discount Cash Flow
ANSWER SHEET
Before Loss
EARNING (EN)
LOSS OF EARNINGS
EARNINGS BEFORE
INTEREST & TAX
(EBIT)
INTEREST PAYMENT
TAX
EARNINGS AVAILABLE FOR
DISTRIBUTION (E)
NUMBER OF SHARES
(m)
EARNINGS PER SHARE
(EPS = E / m)
COST OF EQUITY (KE)
PRICE PER SHARE
(EPS / KE)
MARKET VALUE OF EQUITY
(MVE = E / KE)
MARKET VALUE OF FIRM
(MVF = MVE + MVD)
WEIGHTED AVERAGE COST
OF CAPITAL (WACC)
After Loss
without Reinvestment
ANSWER SHEET
EARNING (EN)
LOSS OF EARNINGS
EARNINGS BEFORE
INTEREST & TAX
(EBIT)
INTEREST PAYMENT
TAX
EARNINGS AVAILABLE FOR
DISTRIBUTION (E)
NUMBER OF SHARES
(m)
EARNINGS PER SHARE
(EPS = E / m)
COST OF EQUITY (KE)
PRICE PER SHARE
(EPS / KE)
MARKET VALUE OF EQUITY
(MVE = E / KE)
MARKET VALUE OF FIRM
(MVF = MVE + MVD)
WEIGHTED AVERAGE COST
OF CAPITAL (WACC)
Reinvestment with
Reinvestment with
Debt Financing
Equity Financing
($ 2MM @12%)
(100M shares @$20)
Leverage Ratio (D/E) & Cost of Capital
D
E
cost of equity (kE)
cost of debt (kD)
효율적 자본구조 (Optimal Capital Structure)
자본구조와 자본비용
1. “Debt is cheaper than Equity.”
i.e. kD < kE
2. “Either Cost of Equity (kE) or Cost of Debt (kD) increases
as the Leverage(D/E) goes up.
자본비용
Cost of Equity (kE)
M&M (Miller & Modigliani)
WACC*
Cost of Debt (kD)
X
부채비율: Leverage (D/E)
* WACC (Weighted Average Cost of Capital) = wEkE + wDkD
ANSWER SHEET
Debt Financing & Equity Financing
(Ex. $1MM @12% + 50M shares @$20)
EARNING (EN)
LOSS OF EARNINGS
EARNINGS BEFORE
INTEREST & TAX
(EBIT)
INTEREST PAYMENT
TAX
EARNINGS AVAILABLE FOR
DISTRIBUTION (E)
NUMBER OF SHARES
(m)
EARNINGS PER SHARE
(EPS = E / m)
COST OF EQUITY (KE)
PRICE PER SHARE
(EPS / KE)
MARKET VALUE OF EQUITY
(MVE = E / KE)
MARKET VALUE OF FIRM
(MVF = MVE + MVD)
WEIGHTED AVERAGE COST
OF CAPITAL (WACC)
Earning
Before Loss
After Loss
$30,000,000
$30,000,000
Loss of Earnings
EBIT
$15,000,000
$30,000,000
$15,000,000
E
$30,000,000
$15,000,000
m
1,000,000
1,000,000
EPS
$30
$15
kE
0.134
0.14
Price Per Share
$223.88
$107.14
MVE
$223,880,597.01
$107,142,857.14
MVD
$0
$0
MVF
$223,880,597.01
$107,142,857.14
WACC
0.134
0.14
Interest Payment