Please enable JavaScript.
Coggle requires JavaScript to display documents.
Valuation and Capital Budgeting for the Levered Firm (Methods of…
Valuation and Capital Budgeting for the Levered Firm
Methods of Investment Appraisal
WACC
Project simultaneously financed by debt and equity
Weightings are usually target ratios
After-tax cost of debt
Rs > Ro > Rb - The risk of debt is relatively low as it is secured and cash flows (interest) are required. Equity does not guarantee cash flows and levered equity is more risk than unlevered.
FTE
Calculate Levered Cash Flow to Shareholders
Calculate Levered Cost of Equity
Value Levered Cash Flows using discount rate
APV
Separates project and financing cash flows
NPV (for unlevered firm) + NPVF (tax shield, financial distress, costs of issuing new debt)
Bank typically lend to firms at a fixed debt-to-value ratio
APV vs FTE vs WACC
Use FTE or WACC when the debt-to-value ratio is constant throughout the project - makes it easy to apply target ratios
(e.g. typical capital budgeting situations)
Use APV when level of debt known over the life of the project
(e.g. LBOs where debt at the start is very high and then falls rapidly)
Beta and Leverage
Financing Risk - risks from the way a project is financed
Business risk - risk of that particular business
Beta coefficient - measures the level of systematic risk
Levered companies are exposed to more systematic risk
New projects in new businesses
Must use the cost of capital of firm already in the business to find our CoC
Determine other firm's Rs
Unlever Rs to find the hypothetical Ro
Determine Rs for our firm
Determine WACC and NPV