Advanced
Finance
Management
Adjusted Present
Value (APV)
冯淇
浙江工商大学
22nd June, 2020
Contents
➢Introduction
➢The Fundamental Idea of APV
➢Steps in a APV Analysis
➢Calculation of APV
➢Example: Dec 2018 Q3 —— Marker’s Answer vs Candidates’
Answer
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Introduction
➢When to use APV
➢The difference between Risk adjusted WACC & APV
➢The theory APV based on: M+M's with tax gearing
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APV: The Fundamental Idea
Value of all financing
side effects
Base-case value Interest tax shields
Value of the
project as if it were Subsidies
APV financed entiely
with equity Issue costs
Investment Decision Other costs
Financing Decision
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Steps in a APV Analysis
Step 1: Prepare performance forecasts and base-
case incremental cash flows for the project;
Discount base-case cash flows and terminal value to
present value
Step 2: Evaluate financing side effects
Step 3: Add the base-case value and financing side
effects together to get an APV
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Calculation of APV
1. Base-case NPV (Investment decision)
The financial risk is ignored in the investment
decision process. Therefore we are only interested
in the business risk ——represented by βasset.
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Calculation of APV
2. Financing side-effect
Here we only interest in financial risk. As we use
debt in APV project, the discount rate we choose is
usually Kd.
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Calculation of APV
•PV of issue costs
➢Gross up- The debt we needed usually includes
no issue cost (at T0 )
➢The tax implications of issue costs
Need to find if issue costs are allowable for tax
purpose (Tax delay)
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Calculation of APV
•PV of the tax relief on interest payments = PV of the
tax shield
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Calculation of APV
•PV of subsidy
➢The subsidy will have a tax shield like all loans
➢PV of the subsidy: PV of the interest saved
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Calculation of APV
3. APV——Add together
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Example: Dec 2018 Q3
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Marker’s Answer
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Marker’s Answer
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Marker’s Answer
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Marker’s Answer
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Marker’s Answer
Conclusion
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Typical errors for (a)
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Typical errors for (a)
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Suggestions for (b)
Always Remember: Discuss means to consider the
pros and cons of an issue.
Common errors:
A focus just on debt financing
Discuss long-term finance policy instead of factors
Much less on factors caused the policy to change
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Typical answers for (b)
Answer Example 1
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Typical answers for (b)
Answer Example 2-1
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Typical answers for (b)
Answer Example 2-2
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Typical answers for (b)
Answer Example 2-3
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Next steps
Step 1: Complete the AFM progress test (PT) under exam condition
Step 2: Refer to suggested answer and carefully read the PT feedback report
Step 3: Join the de-briefing webinar for PT
Step 4: Watch recorded videos to address the problems identified
Step 5: Join the final preparation live webinar 1 week prior to the exam
Please refer to [Link] for more details
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Thank you!
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