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I am confused where to use what formula like
where to use WACC in NPV calculation and where Ke by CAPMPlease clarify and recommend me some sort of short notes on formula application confusion
You can use WACC or Ke as discount factors to calculate NPV, however:
1- If ur cash flows are FREE CASH FLOWS (FCFF), you must use WACC
2- If ur cash flows are FREE CASH FLOWS TO EQUITY(FCFE), you must use KeAnd remember that FCFE
FCFE=FCFF-Interest – Principal payments + Debt issued + Net equity issuedHope that helps!
Thanks for your comments.
I appreciate if you recommend me some sort of key points on formula applications actually I get confused most of the time.In BPP revision Kit Q15 and 16 at one place gearing and ungearing has been done for same sort of data in both questions and then calculated Ke using CAPM for NPV calculation and in another question WACC is used for NPV.
Are they Sleepon and Trosoft?
1- Sleepon: We have to assess the theme park’s investment based on its NPV. It is clear that this project was financed by both equity (i.e 61.4%) and debt (i.e 38.6%), therefore we have to use WACC as discount factor.
2- Trosoft: We would have the same circumstance as Sleepon (i.e financed by equity and debt), but the major difference btw Sleepon and Trosoft is that the examiner required us to apply APV method to assess that project. Therefore, we have to use Ke in this question.
Hope that helps
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