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i’m confuse when to use either APV or Risk adjusted WACC when evaluate new project.does it relate to changes of gearing level or changes of type of business?.
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risk adjusted Wacc is used when the business( measured by the asset beta) and Financial risk (measured by the equity beta) of the industry you intentd to invest in are different from that you already are in. for example you are in the airline business and what to enter the electronics industry. the two industries are exposed to two different risks. also consider the EQUITY/DEBT ratio. one might be all equity financed and by vitual of wanting to enter a new line of business might have to take up debt finance.
APV on the other hand, is used when the business risk is not affected but the financial risk is affected. the following steps are apply.
1. find BA asuming all equity financed.
2. use BA found in the formula for finding BE(EQUITY BETA)
3. use BE in CAPM formula to find KE(Cost of equity)
4. Use KE in Wacc.
5. Calculate the PV of tax shield on debt. and sometimes you might be given issue costs
hope this helpsgud luck
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