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in apv project evaluation, the base npv is discounted based on as if all equity financing for sake of business risk evaluation, and then adding up the financing side benefits such as tax shield on interest payments, i don’t understand why interest payments are excluded in the side benefits, how the financial risks can be evaluated if it was excluded?
thank you so much.According to Modigliani and Miller, the only reason that tax gives a benefit is because of the tax relief on the interest payments. If there was no tax then it would be irrelevant how a project was financed.
I do explain this in my free lectures on M&M and on APV.
thanks for your prompt response but i am still confused.
so how do the after tax interest payments be accounted for the project appraisal, the after tax interest payments is like issue cost which will add up to the financing side effects but not the interest payments, and it seems not correct only add the benefit of tax shield arising from interest payments but not the interest payments itself?
please help.
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