APV

In this lesson

1. 0:00 Adjusted present value overview
2. 1:02 Calculating base case net present value
3. 3:15 Finding ungeared cost of equity
4. 4:30 Worked example: ungeared cost calculation
5. 6:50 Financing impacts and adjustments
6. 7:04 Issue costs and tax relief explained
7. 8:47 Worked example: financing side effects
8. 14:18 Bringing together the adjusted present value
9. 15:10 Advantages and limitations of APV

About this lesson

This is essential for AFM and strategic investment decisions where new debt financing changes both the capital structure and financial risk of the business. The method splits into two distinct calculations. First, you'll calculate the base case net present value using an ungeared cost of equity, forecasting all relevant cash flows (sales, costs, tax, investment, working capital) as you would in a standard NPV. Then you'll evaluate the financing side effects separately: issue costs on raising new debt, tax relief on interest payments, and any benefits from subsidised loans. Each financing element is discounted at either the risk-free rate or the cost of debt, then combined with the base case NPV to reach your adjusted present value. You'll work through a practical example where Anchor Co raises £4 million of new debt to expand into soft drinks. The walkthrough shows you how to ungear an equity beta from a comparable company (ColourPop Co), apply the capital asset pricing model to find your ungeared cost of equity, then systematically calculate each financing adjustment. You'll see how to gross up debt for issue costs, compute annual tax relief using annuity factors, and quantify subsidised loan benefits—all common exam requirements that generate significant marks when tackled methodically. The technique offers a cleaner, more methodical alternative to adjusting the weighted average cost of capital, though it does assume debt is risk-free and irredeemable, and cannot account for bankruptcy costs or agency costs. This makes APV particularly valuable when projects materially change a company's capital structure or financing mix.

Duration: 16m