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Dear tutor
when calculated based NPV, should we normally use Ke as discount factor rather than cost of capital? in Q1, cost of capital been used, I am confused. should we assume Ke as DF for base NPV, any financial cost impact, use Kd?
thanks.
For APV, the base case NPV is calculated by discounting at the ungeared cost of equity (the cost of equity had there been no gearing).
The effect of the debt is calculated by discounting the tax saving on the interest at either the return on debt or at the risk free rate (there are arguments for using each of the rates and the examiner always accepts either).
All of this is explained in my free lectures on APV !!
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