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hi sir
i dont know if youll get this question twice, but i submitted my question and maybe there was a technical error and my question wasnt posted.im struggling with APV the calculation and underlying principle. although i understand the stages and but i am finding it diffcult to answer the questions “why ” and “how”.
my questions:
a)where is the recorded part for example 2 ch12 impact of financing , the APV part.because maybe i missed it in lecture part 1 and 2.
b)what is your suggestion in tackling this topic and understand the concept properly.
c)is APV the type of topic to be asked in Section A?thanks
The lecture on ‘Impact of financing’ part 2, does work through this example.
APV certainly can (and has been) asked in Question 1 of the exam.
APV is more useful (than a WACC approach) when there is a big change in the gearing.
You set up the cash flows in exactly the normal way, but you discount at whatever the cost of equity would be if there was no gearing at all. That gives what the NPV would be if it were to be financed entirely from equity.
As far as the debt that is raised is concerned, according to M&M the only effect of raising debt is that there is the benefit of the tax relief on the interest payments (had there not been tax then the NPV would be the same however the project was financed).
So we then add to the NPV already calculated, the present value of the interest savings on the debt raised.thank you sir
im clear until here and the brief description you have given i understand that concept.the only difficulty i was facing was when doing the kit questions and getting stuck in step 2.
but i guess its only through practice that i will get better.
thanks alot.
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