- This topic has 1 reply, 2 voices, and was last updated 17 hours ago by
.
- Posts
Hi John,
Could you please explain why in the calculation of APV we don’t include the cashflow of the interest payment?
1) step 1: operating cashflow discounted using ungeared ke ( I understand this)
2) step 2: deduct issue cost, adding tax shield on interest paid on the loan
If we don’t include the cashflow of the interest payment in step 2 , isn’t the whole APV gonna be overvalued? Please help me to understand ideally with a numerical example.
Many thanks,You will remember (from Paper FM) that according to Modigliani and Miller then in the absence of tax the total MV of a company stays the same regardless of the level of gearing. They also show that if there is company tax then the MV increases with more gearing and that this increase is solely because of the tax saving that is made on the interest payments. APV is just applying this idea.
I do explain this (with examples) in my free lectures on APV.
- You must be logged in to reply to this topic.