Survey

* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project

Document related concepts
no text concepts found
Transcript
```Adjusted Present Value Approach
Corporate Valuation
Learning
Outcomes
Appraise with the calculation of
present Value Approach of Corporate
Valuation.
Differentiate between DCF and APV
Approach of Valuation
Brainstrom
• The first regards what long-term investments the firm should make
(the capital budgeting question).
• The second regards the use of debt (the capital structure question).
• The third with the optimal balance amongst two.
•
Approach
•
–
–
–
–
Example
Consider a project of the Pearson Company, the timing and size of the incremental after-tax cash flows
for an all- equity firm are:
• -\$1,000
\$125
\$250
\$375
\$500
• 0
1
2
3
4
• The unlevered cost of equity is r0 = 10%:
Example (Cont)
Calculate EV of Riviera Using Adjusted Present Value Approach
millions
Years
1
2
3
4
5
Free Cash Flow 200 250 300 340 380
Firm
• Beyond Year5, the free cash flow to the firm of
Riviera will grow at a constant rate of 10% pa
• Riviera unlevered cost of equity is 14 Percent.
• Riviera Debt-Equity ratio of 4:7
• The risk-free rate of interest is 8 percent
Interest
Bearing Debt
Interest
Expense
500 400 300 200 100
60
48
36
24
12
• Cost of borrowing is 12 Percent
• Tax rate is 30 Percent
• Market risk Premium is 6 percent
Problem
• Unlevered beta and effective tax rate of S Ltd is 0.8 and
35 percent respectively. The company intends to
undertake a project with 60 percent debt financing.
Assuming risk free rate of 7.5 % and market premium 8
%, calculate cost of equity (rounded up to two decimal
points)
• (A) 13.90%
• (B) 20.14%
• (C) 16.40%
• (D) None of (A), (B) or (C)
```
Related documents