Question 2 - Part a

In this lesson

1. 0:00 Introduction to adjusted present value calculation
2. 1:00 Setting up base case cash flows
3. 3:00 Calculating ungeared cost of equity using CAPM
4. 4:32 Computing base case NPV
5. 6:06 Understanding financing side effects overview
6. 6:52 Calculating issue costs on external financing
7. 8:59 Working out tax shield on subsidised loan
8. 10:03 Computing subsidy benefit after tax
9. 14:42 Calculating tax shield on bank loan
10. 20:54 Bringing all elements together for adjusted present value

About this lesson

You'll learn how to structure the calculation logically, starting with the base case net present value using an ungeared cost of equity, then systematically add four financing side effects: issue costs, tax shield on the subsidised loan, subsidy benefit, and the tax shield on the bank loan. The lesson walks you through each step in a spreadsheet, showing you how to apply the capital asset pricing model to find the ungeared cost of equity, use the NPV formula with the correct discount rate, and calculate present values of tax shields and subsidies using annuity factors. A key focus is the bank loan tax shield calculation, which requires you to build a loan amortisation schedule showing opening balance, interest payments, repayments, and closing balance for each year, then determine the tax relief on those interest payments. You'll see how a negative base case NPV can become positive once financing benefits are included, demonstrating why APV is so valuable for investment appraisal. The lesson emphasises practical exam technique: checking figures against the original data to avoid errors, using formula sheets for annuity factors, and prioritising which elements to calculate if time is tight. This is essential material for AFM and similar advanced papers where APV questions carry significant marks.

Duration: 23m