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- This topic has 1 reply, 2 voices, and was last updated 8 years ago by
John Moffat.
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- December 11, 2015 at 7:19 am #290817
Dear John,
I need clarification on following matter:
When appraising a project which does not effect business or finance risk we use existing WACC of the company.
If business risk is changed we use risk adjusted WAAC ( ungearing and regearing beta etc)
If finance risk is changed one way is to reflect new structure in WACC however as WACC assumes the debt is irredeemable it is better to use APV.
However which method is so use when both finance and business risk are changed?
APV is more appropriate right? we would calculate the all equity financed project value using new beta and than we will adjust it with costs/benefits of debt.please confirm if this understanding is correct.
December 11, 2015 at 9:26 am #290850Everything is correct, except the bit about finance risk changing. It is not to do with debt being irredeemable.
For small changes in gearing then WACC is OK, but for large changes in gearing then APV is better – the rest of what you wrote is fine 🙂
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