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Hi,
I got a few questions about APV method. What if the stock issuance cost is 300? Is it accounted in initial cash outlay and used to calculate base-case NPV? What about the debt issuance cost? It should be calculated as PV of debt issuance right? What discount rate used to tax shield gains and debt issuance then?
Thanks for help
JosephAs far as the cost of raising finance is concerned, it will be payable immediately and therefore will not need discounting.
We normally show as an adjustment it below the base case NPV as with the tax benefit on debt.With regard to the tax saving on the interest, there are arguments for either discounting it at the risk free rate or at the yield on debt – the examiner accepts either (even though obviously the final result will be different. I explain this in my free lectures on APV.
Dear John,
Just to make sure, so if i have equity issuance cost(200) i leave it as a part of initial cash outlay? Moreover, if i have debt issuance cost(100), I discount it at cost of debt and add as a cost(as part of financing side effects) to the base-case NPV? I will take a look on your lectures but the deadline for the task is soon, thanks for the help.
Joseph
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