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Good afternoon sir!
1. in this question, we are given the Rf (4%) and the rate of debentures (8%).
i used the 4% rate for APV but the answer uses 8%.
is it correct to assume that either can be used?
2. in the cashflow itself, i also get a BA of 1392 at the end of year 4, which the answer seems to ignore. can you tell me why?
regards
1. For APV there is a debate as to which is better – the debenture rate or the risk-free rate (in theory they should be the same, but in practice and in exams they are not).
In the exam you get full marks whichever of the two rates you use (but obviously make sure it is clear in your workings).
2.It is because note (ix) says that it is the after-tax realisable value is 1.5M. So the assumption is that it is after the tax effect of any balancing allowance or charge.
Hello sir. First of all I what to thank you for your useful lectures and support.
My question is regarding Tampem (Dec. 06) part (a) Calculate NPV and APV of the proposed investment.I understand that with APV, the base case NPV is calculated assuming that it is all equity financed (so no interest), but when we calculate NPV using WACC as discount rate why we do not deduct the interest cost before discounting it?
Because it would be accounting for the interest twice. The interest is included in the calculation of the WACC.
I do suggest that you watch my free lectures (and maybe the relevant Paper FM (F9) lectures) because this is a fundamental point in regard to NPV calculations.
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