My understanding is that all equity financed projects are those financed without debt.
However, the sample question on the AFM CBE practice platform calculated the cost of capital for all equity financed project but stated that the project is entirely financed by debt. Kindly correct me where am I going wrong sir
Ask the Tutor ACCA AFM
COST OF CAPITAL
5y ago#1I do not have access to the practice platform and so I do not know the question. (However if you tell me the name of the question I can probably find it because it is probably a past exam question).
Without having seen this particular question I would guess that it is calculating the adjusted present value (because there is a major change in the gearing if it is being financed entirely from debt). For APV we always calculate the base case NPV by discounting as though it were entirely equity financed, and then add on the tax shield which is the PV of the interest saving on the debt raised. This all comes from Modigliani and Millers' theory of gearing and is all explained in my free lectures on the Adjusted Present Value.
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