Finanças
December 5
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Topics covered
An example of APV
 Beta and leverage
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APV Example:
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A firm is considering replacing a $5 million piece of
equipment. The initial expense will be depreciated straightline to zero salvage value over 5 years;
The project will generate pretax savings of $1,500,000 per
year, and not change the risk level of the firm.
The firm can obtain a 5-year $3,000,000 loan at 12.5% to
partially finance the project.
If the project were financed with all equity, the cost of capital
would be 18%.
The corporate tax rate is 34%.
The risk-free rate is 4%.
The project will require a $100,000 investment in net working
capital.
Calculate the APV.
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APV Example:
APV =
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APV Example: Cost
• The cost of the project is
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APV Example: PV unlevered project
PV unlevered
project
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Beta and Leverage
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Recall that an asset beta would be of the
form:
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Beta and Leverage
Riskless debt
Risky debt
Without
corp tax
With
corp tax
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Beta and Leverage: with Corp. Taxes
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In a world with corporate taxes, and riskless
debt
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Beta and leverage: Example
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A firm considers to invest $1 million in a new
project.
The projct is expected to bring a perpetual
unlevered after-tax cash flow of $300,000 a year.
The target debt to equity ratio for this project is
1.
The three competitors in the same industry have
unlevered betas of 1.2, 1.3, 1.4.
The risk free rate is 5%. The market premium is
9%.
The corporate tax rate is 34%.
What is the NPV of the project?
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Beta and leverage: Example
1. Average unlevered beta:
2. Levered beta:
3. Cost of levered equity Rs
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Beta and leverage: Example
4. Rwacc
5. NPV
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