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Can anybody prove that both method lead to the same answer? Or tell me what is wrong?
I am stuck in the Chapter 12 example2 of OT P4 lecture note on page 60. After my computation, there is a little difference of using wacc compared to the apv.APV method = 28.64
wacc methodBa=1.5=7*Be/(7+3*0.7) ,So Be=1.95
Ke=5%+(15%-5%)*1.95=24.5%
wacc=(24.5%*7+5%*0.7*3)/10=18.2%
df=3.11NPV= -100+40*3.11=24.52
Is anywhere going wrong? please help?thanks!
well I have not checked the example..
But both methods will give close answer.. and both methods are correct..as adjusted WACC means debt effects are adjusted in rate and in APV we add debt effect separately.. both makes sense..
I somewhat get your point. But In the lecture, it’s said that the both ways will lead to EXACTLY same answer. So I think there should be some wrong with my understanding.
I really want to see the solution of wacc in NUMBERS.
Can anyone give us a hand? Thanks in advance!- Topics: 0
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Kateker,
Regarding your query about the equivalence of WACC and APV (and FCFEquity for that matter) …
I tried exploring this a while ago, and eventually I cracked it. However, in order to get exactly the same results from the three approaches, the investment horizon has to be infinite, i.e. perpetual cash flows. This is because the formulae for de-gearing and re-gearing WACC and Betas all assume perpetual cash flows (the clue is in the tax shield that is taken out in the denominator … E + D(1-t) … i.e. Dxt is subtracted, and the tax shield only equals Dxt when the debt is perpetual debt).
Also, one has to be very careful if you incorporate growth into the cash flows, because the growth rates on the WACC and FCFEquity approaches are equal, but the equivalent growth rate using the APV approach is different (this is because the cash flows are being re-invested at a different rate … ke,u and not WACC or ke,g).
I have a fully worked through example, but have not typed up the answer yet … I simply teach it in class and write up the answer. But, I will see if I can get it completed some time soon and then post it up for you.
Jerry.
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