Business Case Studies & Business Publications

An Introduction to Debt Policy and Value

Bruner, Robert F.

Exercise

An Introduction to Debt Policy and Value

Bruner, Robert F.

F-0811 | Published March 28, 1989 | 5 pages Exercise

Collection: Darden School of Business

Product Details

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.

The first aim of this exercise is to illustrate Modigliani and Miller's theory about the relationship between debt and firm value in a taxable world. In particular, it illustrates the effect of debt tax shields. The second aim is to illustrate the core principle of value additivity as implied in the Modigliani and Miller theory.