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Hi Mr Moffat.
I understand the whole thing behind Apv even watched your awesome lecture that leaves no room question.
However, some additional questions came into my mind and would like to seek a better understanding.
Suppose there is no subsidised loan. Even if the capital structure is being changed towards more gearing. The new wacc would be calculated and wouldn’t it be the same thing? Discounting at new wacc instead of Apv.
Considering if the above holds true. Is Apv technique merely a way of better presentation for financial managers so they could clearly see the effects of financing in a transparent manner as contrast to if they were boiled into wacc.
Another question that just popped in. We stress the fact that high level of debt if raised would render the current wacc useless hence Apv. Wouldn’t be the same thing if capital structure changes through equity as well. If a company pumps in ton of equity by issuing new shares. Current wacc would also be not applicable for discounting purpose
Lastly question related to calculation.
In all the example so far the term of the loan matches the life of the project. What if the company is unable to negotiate a long term loan or debt and the debt is repayable after 5 years instead of 10 yrs which is the life of the project. How would this impact the calculation
Question 2 Tippletine Co. march/june 2018 using M&M Model 2 to calculate Ungeared Ke . But you haven’t discuss it in your lectures.?
Can u explain how this formula working.
Ke(geared)=Ke(Ungeared)=(1-T)(Ke(u)-Kd){D/E}nikaido :
If we are asked for the APV, then it makes no different whether there is a subsidised loan or not. We calculate the NPV as though the project is entirely equity financed and then add on the tax benefit attaching to the interest on whatever borrowing there is (whether the loan is a subsidised loan or not).
Adrian Yousuf:
Of course M&M Proposition 2 is explained in my lectures.
See the second page of Chapter 12 of the free lecture notes and the lectures that go with it.Dear tutor i am confused between Ba=E/E+D(1-T)*Be and Ke(geared)=Ke(Ungeared)=(1-T)(Ke(u)-Kd){D/E}.
Can you plz clear it, in what situation we use these formulas.Dear Mr Moffat
Could you please request other members to make there own post for questions
Yes I am familiar with the workings of the apv. my question was somewhat else. Let me rephrase.
Instead of calculating apv . If we calculated the new wacc based on further borrowing.
The resulted npv would be the same as apv?
Adnan Yousuf: Both formula would end up giving the same result (as I state in my lectures). Which is the quickest depends on the information given to you in the question. Using M&M Proposition 2 is actually rarely needed in the exam.
Nikaido: You are right in that users should make new posts, but to be fair I think Adnan Yusuf thought that your question had been dealt with.
But no. Discounting at the new WACC would not give the same result because it would also affect the value of the existing investments. What you could do is calculate a WACC specifically for the new project but this would be much more complicated. As far as the exam is concerned, questions either specifically ask for the APV (in which case you obviously have no choice and which is normally the case) or have a significant change in the gearing and as part of the question ask you to justify the method you have used, and that is the clue to calculating the APV.
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