15-6 M&M (Debt Policy Doesnt Matter) Example Data Number of shares 50.000 cont Price per share $10 吧吗 50%debt Market Value of Shares $500.000 Market val ue of debt $500.000 Outcome State of the economy Slump Expected Boom Operating Income $75,000125,000175,000 nterest $50.00050.00050,000 Equity earnings $25,00075,000125,000 Earnings pe er share $.501.50 2.50 Return on shares 5% l5% 25% Irwin/McGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 15- 6 Irwin/McGraw-Hill Example cont. 50% debt Returnon shares 5% 15% 25% Earnings per share $.50 1.50 2.50 Equity earnings $25,000 75,000 125,000 Interest $50,000 50,000 50,000 Operating Income $75,000 125,000 175,000 Slump Expected Boom Outcome State of the Economy Market val ue of debt $ 500,000 Market Value of Shares $ 500,000 Price per share $10 Number of shares 50,000 Data M&M (Debt Policy Doesn’t Matter)
15-7 M&M (Debt Policy Doesnt Matter) Example- River Cruises- All Equity Financed Debt replicated by investors Outcome State of the economy Slump Expected Boom Earnings on two shares $1.502.50 3.50 LESS: Interest @10% $1001.00 1.00 Net earnings on investment $.501.50 2.50 Return on S10 investment 5% 15 25 Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 15- 7 Irwin/McGraw-Hill Example - River Cruises - All Equity Financed - Debt replicated by investors Returnon $10 investment 5% 15% 25% Net earnings on investment $.50 1.50 2.50 LESS :Interest @10% $1.00 1.00 1.00 Earnings on two shares $1.50 2.50 3.50 Slump Expected Boom Outcome State of the Economy M&M (Debt Policy Doesn’t Matter)