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class #20
page 1
Adjusted Present
Value (APV)
class #20
class #20
page 2
Today’s plan
•
Really understand this capital structure stuff
•
Learn a second way to value a firm (APV)
–
we have talked about WACC already
•
Next class we will compare WACC, APV and multiples
class #20
page 3
Office hours
• For the remainder of the semester, I really want to help
students learn the material
• You may come to office hours at any of the following
times (still in room F494):
– Tuesdays:
12:45  1:45pm
– Wednesdays:
9:30  10:30am
class #20
page 4
Excel workbook
• There is an excel workbook on Catalyst under “Handouts”
• It uses the same numbers as the example in class today
class #20
page 5
Let’s think about a company
•
What is a company ?
•
Let’s think about a factory that makes blue ball point pens
•
The factory (hopefully) turns out profits every year
class #20
page 6
Let’s think about a company (2)
•
The company’s assets were initially paid for by investors
(providers of capital)
•
These providers of capital expect a return on their
investment
there can be debt holders
there can be equity holders
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class #20
page 7
How much is this company worth?
• We can value the factory (and its ability to produce cash)
• We can also find out how much the “providers of capital”
value their (individual) claims on the company
class #20
page 8
Company value
• Let’s suppose neither the debt nor the equity is traded
• Therefore, valuing the right hand side is VERY difficult
Assets
Debt
Equity
?
?
class #20
page 9
Company value (2)
• So let’s try to value the left hand side
• To start with, we will assume our company is financed by
all equity
Assets
Equity
class #20
page 10
Company value (3)
• Let’s suppose our assets are expected to turn out an
operating profit of $1.0mm per year, every year, forever
• The cash flows are not risk less
• Our ability to produce and sell pens is subject to general
economic conditions and our ability not to blow up our
own factory (market and unique risk)
• In fact,
β
A
= 0.60
Assets
Equity
class #20
page 11
Company value (4)
• The risk free rate = 8%
and
market risk premium = 7%
• The EBIT is $1.00mm per year (forever)
• Assume the tax rate is 35%
• Therefore, the aftertax profits are $650,000 per year
• (technical assumptions:
depreciation = cap ex.
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This note was uploaded on 12/06/2011 for the course UGBA 103 taught by Professor Berk during the Fall '07 term at University of California, Berkeley.
 Fall '07
 Berk

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