APV

Question 1

What does APV stand for?

Answer 1

Adjusted Present Value

Question 2

When is it appropriate to use APV to evaluate a project financed with new debt?

Answer 2

When the capital structure changes significantly, and thus WACC is no longer appropriate.

Question 3

APV Step 1:

Answer 3

Calculate a base case value (NPV) of a project using the Keu as a discount factor (cost of equity for an ungeared company).

Question 4

Keu formula?

Answer 4

Rf + Beta * (Rm - Rf)

Question 5

APV Step 2:

Answer 5

Find the present value of the tax shield

Question 6

Present value of tax shield formula?

Answer 6

£ Debt x Int % x Tax % x Annuity factor

Question 7

APV Step 3:

Answer 7

APV = NPV + PV Tax Savings - Issue costs

Question 8

What is the following question asking for you to do?
What appraisal methodology should be used if the project is financed entirely by debt?

Answer 8

Calculate the Adjusted Present Value

Question 9

When is APV Relevant

Answer 9

When the capital structure (D/E) is expected to change