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Dear Sir
Where is the clue in this question that says you must use APV? It says the whole project is being financed by debt. My first instinct was to get the asset beta and re gear it to Fubuki (obviously wrong). Your lecture on APV said they would always say when to use APV, but here they have not.
To me the clue would be (if I thought I knew what i was talking about) that they were financing with all debt which would tell me the gearing was going to change. (that would be my clue I suppose)
No – I say that the question will normally make it clear (and normally it does – either by asking specifically for the APV or by asking you to discount the FCFE at the unguarded cost of equity, which means the same thing).
However I also make it clear that APV is better when there is a significant change in the gearing. Here there is certainly a significant change.
Right, that’s what I thought. Thanks….so all these sort of “financing totally with debt” sort of should make it obvious?
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