▪ Adjusted Present Value (APV)
Steps of Calculating APV
Example for Calculating APV
Summary of Key Points for AFM Exam
AFM Exams for NPV
• Make an APV Layout: 201306Q1(a2)
• Fix an APV Layout: 201406Q2
Steps of Calculating APV
• Step 1 - calculate the base case NPV as if ungeared using an asset beta or using the M&M formula for Kei
• Step 2 - add the PV of the tax saved as a result of the debt & benefit of subsidy (use Kd)
• Step 3 - subtract the cost of issuing new finance
Calculate the Base Case NPV with Cost of Equity
NPV Layout
Cost of Capital (Equity)
• CAPM with Asset Beta
• Kei Using M&M formula
CAPM with Asset Beta
• The beta of a company is called an equity beta-this reflects both business risk (the risk of the business operations) and financial risk (the risk of using debt finance in the capital structure).
• To understand the level of business risk (only) faced by a business, an equity beta can be adjusted to show its value if the company was ungeared. An ungeared beta therefore measures only business risk, not financial risk.
• Calculate Asset Beta with the Equity Beta of Proxy Company
Formula provided for calculating an asset beta
• Calculate Keep with CAPM model using asset Beta
Formula provided
Kei Using M&M formula
• Calculate Kei with the Ke of Proxy Company
Formula provided for ungearing the cost of equity in Step 1
Ke=cost of equity of a geared company, =cost of equity in an ungeared company