June 2008 Neptune — OpenTuition Forums

JJhanesh8y ago

Hello all, So. I am confusing myself to no end with the calculation of ke - in order to discount the cash flows.. The company has $7500eq & $2500debt. It now intends to issue bond to raise finance for capital expenditure of $800m. It does seem that cap expenditure is related to telecommunication business & new issue is said to not affect company's bond rating. As per acca's answers guide, they calculate the asset beta (ungeared) - using beta eq provided in case & current market value of eq & debt... This Asset beta value is used into the CAPM formula to find the cost of equity. This is a new project. Should we not find a project specific cost of equity? Doesn't issuing the new bond affect the gearing ratio (increasing the value of debt)? Like find Bequity for new gearing & plug that into the CAPM formula... Can anyone please explain? Thank you. J

John MoffatTutor8y ago#1

If you ask in this forum, then "all" and "anyone" will always be me (because it is the Ask the Tutor Forum) :-) This question specifically asks for the adjusted present value, and for the APV we always discount the project as though it was all equity financed and then afterwards add on the tax benefit associated with the debt raised. (A 'project specific cost of equity' is only relevant if we were to be calculating a WACC and discounting at the WACC.) I do suggest that you watch my free lectures on APV.

JJhanesh8y ago#2

Thank you for your reply John. New here. :) Will watch the lectures for sure. Have a good day.

John MoffatTutor8y ago#3

You are welcome :-)

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