Professional Documents
Culture Documents
APV =
0%
10%
$120,000 $120,000
0
4,125
120,000 115,875
60,000
57,938
60,000
57,938
60,000
57,938
60,000
62,063
8.25%
12.50%
0
50,000
500,000 463,500
500,000 513,500
0
500,000
500,000
0.0%
0.0%
12.0%
$60,000
$500,000
50,000
450,000
500,000
10.0%
9.7%
11.7%
$60,000
$513,500
APV procedure
1. Calculate value of the firm assuming it
is all equity financed (i.e. no interest
expense)
Discount rate uses CAPM and asset
(unlevered) beta
2. Calculate the value of tax shields
(based on the difference in tax
payments vs. the unlevered case in
step 1).
APV Example
Assume:
Asset beta = 0.7
Long Term Treasury = 6%
Market Premium = 7.8%
From CAPM, Discount rate = .06 + .7*.078 = .1146
Also assume: Terminal value = (approx.) 7 x FCF
Step 1:
Year:
EBIT
Tax @ 40%
Capex
Depreciation
Increase in NWC
FCF
Terminal Value
1
100
40
30
20
20
30
2
108
43
32
22
22
33
3
116
46
35
24
23
36
4
124
50
37
26
25
38
5
134
53
40
28
27
41
287
PV@11.46
27
26
26
25
24
167
Total PV
295
Year:
EBIT
Interest (=outstanding debt*.08)
Profit before tax
Tax
Profit after tax
Capex
Depreciation
Increase in NWC
Cash flow available to pay down debt
Ending Debt =
(beginning debt pay down)
1
100
12
88
35
53
30
20
20
23
2
108
10
98
39
59
32
22
22
27
3
116
8
108
43
65
35
24
23
31
4
5
124 134
6
3
118 131
47 52
71 79
37 40
26 28
25 27
35 40
127
101
70
35
40
35
5
PV of tax savings @ 8%
$13
43
39
4
46
43
3
50
47
3
53
52
1
$37