APV

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April 13, 2018 at 5:02 pm #446573
hemraj123
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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?
April 13, 2018 at 5:24 pm #446580
John Moffat
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Because 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.
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