Question

Asked Oct 30, 2019

6 views

This question is related to Chapter 18 of Berk & Demarzo "Capital Budgeting and Valuation with Leverage".

How do the calculations of the firm value using the APV method differ between the following assumptions?

- The growth rate of the EBIT and the debt-equity ratio will be constant
- The growth rate of the EBIT and the interest coverage ratio will be constant.
- The firm selects the optimal interest coverage ratio and maintains this ratio constant forever (corporate taxes are the only imperfection)

Are the values that result different or equal?

1 Rating

Step 1

With constant debt-equity ratio

Adjusted Present Value is used to value a firm’s total investment by first calculating the unlevered value of the firm and then adding it to the interest tax shield to find the value of the firm with leverage.

It is calculated using the below formula:

Step 2

First step:

Calculate the present value of the free cash flow using an unlevered cost of capital

Step 3

Calculate the present value of interest tax shield as PV (interest tax shield)

Subtract present value of any cost assoc...

Tagged in

Q: In "Retail: Discounters Get Their Day”, Business Week, January 14, 2002, the authors suggest that c...

A: Excessive Build-up of Inventory: When the inventory stocked or piled up in the store or company more...

Q: An investor buys stock for $10,000 and earns dividends of $25” during the course of the year. At the...

A: Calculation of Capital Gains Yield:The capital gains yield is -7%.Excel Spreadsheet:

Q: Hi, An investor will choose between Asset Q with an expected return of 6.5% and a standard deviation...

A: Information provided:Asset Q has an expected return of 6.5% and standard deviation of 5.5%Asset U ha...

Q: The CFO of briggs industries is evaluating a capital budgeting project that should extend over 4year...

A: Part A: Cost of Equipment = $100,000 Calculation of depreciation of each year under two different de...

Q: Which of the following correctly indicates how the issue price of common stock shares would be value...

A: Price of an IPO is determined by the performance of the company and their expectation on the price m...

Q: Atlantic Corporation is the largest logging company in the north eastern part of the United States. ...

A: a.Calculate the value of the stock as follows:

Q: Consider the following income statement for the Heir Jordan Corporation: HEIR JORDAN CORPOR...

A: Income statement for Year 2, using the percentage of sales approach is prepared as below

Q: Consider the following table, which gives a security analyst's expected return on two stocks for two...

A: For the Calculation of Alpha, first we have to calculate Beta of each stocks and Beta can be calcula...

Q: Which would provide a bank holding company with guidance on the types of nonbanking activities it ca...

A: Bank Holding Companies are governed by Bank Holding Company Act (BHC Act) of 1956, which gives Feder...