Sir,
In APV calculation we take into account
1) The NPV of the project if it was all equity financed. Thus keeping the cost of equity (return to shareholders) in mind.
2) The PV of tax shield. Showing the tax benefit received from using debt element to finance the project. (Whether partly or wholly)
My question is that if some portion of the debt is used to finance the project and the tax benefit received is on the interest amount paid. Then why is the effect of the interest (Cost of debt) not included in APV?
Ask the Tutor ACCA AFM
APV
8y ago#1Because it is Modigliani and Miller. According to M&M, the only difference between being all equity and being geared is the tax benefit on the interest on the debt raised.
Sign in to reply to this topic.