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Hello Sir,
Please have a look at the Adjusted Present Value calculations for this question.
I dont understand logic behind how:
1) Why they are using Intergrand’s WACC to discount the cashflows ? Are they assuming that WACC contains no cost of debt ?
2) How they worked out the total value of publicity ?? Whats the logic behind using
(Intergrand WACC) in the calculations ??3) For the tax shield on the bonds, why they discounted at risk free rate of 4% when they could have calculated the pre-tax cost of debt ??
1. They have used the ungeared cost of equity of Oldberg to discount the operating cash flows, as always with APV calculations.
When calculating the PV of other effects, they have used the WACC of Intergrand to calculate the PV of the extra tax. It is arguable about which rate to use here – there is a logic sousing Intergrand’s WACC, but using the same rate as for the operating flows would be acceptable (provided, as always, it was clear in your workings what you were doing).2. Note (ix) of the question gives the value of the publicity. On the assumption this continues in perpetuity it has been discounted as perpetuity. Since it is Intergrand that gets the benefit then using Intergrands WACC is logical.
3. I make it very clear in my free lectures that there is an argument for using either of the two rates (and i explain the arguments), and that the examiner always accepts either.
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