Valuation and capital budgeting for the levered firm

Valuation and capital budgeting for the levered firm -...

This preview shows pages 1–6. Sign up to view the full content.

Click to edit Master subtitle style 10/2/11 Valuation and capital budgeting for the levered firm 11

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
10/2/11 Adjusted present value approach (APV) The value of a project to a levered firm (APV) is equal to the value of the project to an unlevered firm (NPV) plus the NPV of the financing side effects (NPVF) APV = NPV + NPVF Side effects Interest tax shields: PV of tax shields is TCD, where TC is the tax rate and D is 22
10/2/11 APV: an example A firm is considering a project with the following characteristics: Sales = \$500,000 per year for indefinite future Costs = 72% of sales Initial investment = \$440,000 TC = 40%, and rA = 20%, (cost of capital for an all- equity firm) 33

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
10/2/11 APV: An example Suppose that the firm finances the project with exactly \$116,666.67 in debt, so the remaining investment of \$323,333.33 is financed with equity. Ø The NPV of the project under leverage APV = NPV +TCD = -20,000 +40%*116,666,67 = 26,666.67 why do we choose such a precise 44
10/2/11 Flow to equity approach (FTE) The formula simply calls for discounting the cash flows from the

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern