Lecture7 - when to use APV

12 yr1 yr2 yr3 yr4 yr5 yr6 debt 71 61 51 41 31 21

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Unformatted text preview: e = $15/.18 = $83.33 Naïve WACC misses the additional tax shields in yrs 1­5 11 Sophisticated WACC Valuation The only way to make it work is to adjust the weights every year in the calculation of WACC. Adjusting the debt­to­equity ratio changes your estimation of the cost of equity (Rs). This change in Rs together with the changes in the weights B/(B+S) and S/(S+B) will change WACC. WACC will be different for each of the years 1 to 5, and will be constant and equal to 18% starting in year 6. This is because in year 6, all new debt has been retired, and so the firm is back at its target capital structure,...
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This document was uploaded on 03/09/2014 for the course COMM 371 at UBC.

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