Lecture7 - when to use APV

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Unformatted text preview: NEW DEBT Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 50.00 40.00 30.00 20.00 10.00 0.00 Interest rate 0.10 0.10 0.10 0.10 0.10 0.10 Tax rate 0.40 0.40 0.40 0.40 0.40 0.40 Interest Tax Shields 2.00 1.60 1.20 0.80 0.40 0.00 Disc. Factor at 10% 1.10 1.21 1.33 1.46 1.61 1.77 Disc. Tax Shields 1.82 1.32 0.90 0.55 0.25 0.00 PV of Tax Shields $4.84 New Debt APV = $75 + $8.40 + $4.84 = $88.24 10 Naïve WACC Valuation Assume that the firm is always at the target capital structure (hence naïve). No weights at market value… Rs = Ro + (B/S)x(1 ­ t)x(Ro ­ Rb) = .2 + (1/3)x(1­.4)x(.2­.1) = 22% WACC = S/(S+B)xRs + B/(S+B)xRbx(1 ­ t) =(3/4)x.22 + (1/4)x.1x(1­.4) = 18% Valu...
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This document was uploaded on 03/09/2014 for the course COMM 371 at UBC.

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