Analytical Methods for LawyersFinance UnitLast updated 01 Mar 07
Schedule
ClassTopic3/1IntroductionSpreadsheet primer3/6TVM future valueExercise 13/8TVM present valueExercise 23/20Discount rateExercise 33/22ECMHReadings 3/27Risk and returnExercise 43/29Valuation medical malpracticeGroup problem 14/3Valuation corporate appraisalGroup problem 2
Why the firm?
Theory of the FirmFirmCapitalLandEquipmentSuppliesLaborAdam SmithWealth of Nations
Why not contracting?
Theory of the FirmCapitalEntrepreneurLaborSuppliesLandEquipmentRonald CoaseNature of the Firm
Theory of the FirmCapitalEntrepreneurLaborSuppliesLandEquipmentRonald CoaseNature of the Firm
What is the modern public corporation?
Separation of ownership/controlEntrepreneurs(capitalist managers)CapitalLandEquipmentSuppliesLaborAdolf Berle & Gardiner Means
Separation of ownership/controlProfessional managersLandEquipmentSuppliesLaborAdolf Berle & Gardiner MeansCapital(diffuse publicownership)
What is ideal ownership debt or equity?
Optimal debt-equity mixManagersLandEquipmentSuppliesLaborFranco Modigliani &Merton MillerCost of CapitalDebtEquity
Optimal debt/equity mixNetAssetsDebtEquityDebt:PriorityFixed rate of return Optimaldebt/equity?Equity:Voting controlResidual returns
Optimal debt/equity mixNetAssetsDebtEquityLess debt:Large equity cushionLower risk lower costOptimaldebt/equity?More equity:Low leverageLower returns higher cost
Optimal debt/equity mixNetAssetsDebtEquityMore debt:Small equity cushionHigher risk higher costOptimaldebt/equity?Less equity:High leverageHigh returns lower cost
Modigliani & Miller
Return on AssetsCost of debtCost of equityAverage cost of capitalHigh D/E (90/10)15%14%24%15%Mid D/E (50/50)15%10%20%15%Low D/E (10/90)15%6%16%15%
Modigliani & Miller
Return on AssetsCost of debtCost of equityAverage cost of capitalHigh D/E (90/10)15%14%24%15%Mid D/E (50/50)15%10%20%15%Low D/E (10/90)15%6%16%15%
Modigliani & Miller
Return on AssetsCost of debtCost of equityAverage cost of capitalHigh D/E (90/10)15%14%24%15%Mid D/E (50/50)15%10%20%15%Low D/E (10/90)15%6%16%15%
Modigliani & Miller* Interest is deductible (debt subsidized by govt)
Return on AssetsCost of debtCost of equityAverage cost of capitalHigh D/E (90/10)15%14%24%15%*Mid D/E (50/50)15%10%20%15%Low D/E (10/90)15%6%16%15%
How unify ownership and management?
Leveraged firmManagersLandEquipmentSuppliesLaborMichael Jensen &William MecklingManagerial BehaviorOutsidedebtInside equity
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