$ 700

$ 724

We immediately see that capital structure is now having some effect because the cash flows from U and L are not the same even though the two firms have identical assets.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VI. Cost of Capital and Long-Term Financial Policy

17. Financial Leverage and Capital Structure Policy

© The McGraw-Hill Companies, 2002

PART SIX Cost of Capital and Long-Term Financial Policy interest tax shield

The tax saving attained by a firm from interest expense.

unlevered cost of capital

The cost of capital of a firm that has no debt.

To see what's going on, we can compute the cash flow to stockholders and bondholders.

Cash Flow

Firm U

Firm L

To stockholders



To bondholders

0 0

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