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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,18-,*,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,Valuation and Capital Budgeting for the Levered Firm,Chapter 18,Copyright 2010 by the McGraw-Hill Companies,Inc.All rights reserved.,McGraw-Hill/Irwin,Valuation and Capital Budgetin,0,Key Concepts and Skills,Understand the effects of leverage on the value created by a project,Be able to apply Adjusted Present Value(APV),the Flows to Equity(FTE)approach,and the WACC method for valuing projects with leverage,Key Concepts and SkillsUnderst,1,Chapter Outline,18.1 Adjusted Present Value Approach,18.2 Flows to Equity Approach,18.3 Weighted Average Cost of Capital Method,18.4 A Comparison of the APV,FTE,and WACC Approaches,18.5 Capital Budgeting When the Discount Rate Must Be Estimated,18.6 APV Example,18.7 Beta and Leverage,Chapter Outline18.1 Adjusted,2,18.1 Adjusted Present Value Approach,APV=NPV+NPVF,The value of a project to the firm can be thought of as the value of the project to an unlevered firm(,NPV,)plus the present value of the financing side effects(,NPVF,).,There are four side effects of financing:,The Tax Subsidy to Debt,The Costs of Issuing New Securities,The Costs of Financial Distress,Subsidies to Debt Financing,18.1 Adjusted Present Value Ap,3,APV Example,01 2 3 4,$1,000$125$250$375$500,The unlevered cost of equity is,R,0,=10%:,The project would be rejected by an all-equity firm:,NPV,b,Unlevered firm,Beta and Leverage:With Corpor,26,If the beta of the debt is non-zero,then:,Beta and Leverage:With Corporate Taxes,If the beta of the debt is non,27,Summary,The APV formula can be written as:,The FTE formula can be written as:,The WACC formula can be written as,SummaryThe APV formula can be,28,Summary,Use the WACC or FTE if the firms target debt to value ratio applies to the project over its life.,WACC is the most commonly used by far.,FTE has appeal for a firm deeply in debt.,The APV method is used if the level of debt is known over the projects life.,The APV method is frequently used for special situations like interest subsidies,LBOs,and leases.,The beta of the equity of the firm is positively related to the leverage of the firm.,Summary,29,Quick Quiz,Explain how leverage impacts the value created by a potential project.,Identify when it is appropriate to use the APV method?The FTE approach?The WACC approach?,Quick QuizExplain how leverag,30,
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