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Articles by Probir Banerjee
Page 17 of 45
How are Issue Costs handled in calculating the APV of a project?
What are Issue Costs?When companies raise money from the market, it needs to distribute securities in the market which requires the company to incur some cost. These one-time costs are called issue costs that have to be considered while the project begins. It is a preliminary cost all companies must spend to raise money from the investors in the market.How to Handle Issue Costs?Issue costs are handled at the outset of a project. The best way to manage the issue cost is to use the APV model to evaluate an investment project. In APV approach, the issue cost is discounted ...
Read MoreWhat is Levered Cost of Equity?
The levered cost of equity represents the risk components of the financial structure of a firm. To finance the projects of a firm, companies often need to resort to debt that is collected from the market. The market offers the debt by the resources of the investors.In case of levered cost of equity, the firms have larger debt proportions, and hence the firms must convince the investors that it is capable to provide the business and financial risk premiums.In general, when a company uses unlevered cost of equity, it does not go for debts from the market. It uses the ...
Read MoreBalance Sheet Approach to evaluate a firm
A balance sheet is made up of assets and liabilities and hence the balance sheet approach of evaluating a firm shows the values of the assets of a company.Book Value of Assets is the Minimum Value of a FirmWhen the values are un-adjusted, the balance sheet approach indicates the claims of investors over the assets of the company. That is, the book value of equity funds and debt funds represent the value of the firm the investors have ownership on. Therefore, the minimum value of a firm is equal to the book value of assets.Value of a Firm is Worth ...
Read MoreEvaluating New Projects with Weighted Average Cost of Capital (WACC)
The Free Cash Flow approach using WACC for the evaluation of investment projects has certain limitations −Cash Flow PatternsThe original WACC is based on an assumption that cash flow patterns are perpetual. In fact, there is no such behavior in case of cash flow patterns. However, WACC works in all types of cash flows.Business RisksWACC assumes that a project or a business has the same risks as the existing assets of the company. This may be true in case of a small expansion in assets but for completely different types of businesses, this may not be applicable.The evaluation of a ...
Read MoreWhen Adjusted Present Value (APV) approach is used?
The Adjusted Present Value of a project takes the Net Present Value (NPV) of a project and adds this with the cost of debt, including financing effects, such as interest tax shield, issue costs, costs of distress, and subsidies etc. The APV is used instead of NPV for evaluating an investment project for various reasons. Here's why APV is used more frequently than other methods of evaluation of a project.The Effect of Debt and EquityThe use of all-equity financing may be debilitating for the health of a company's financials. In some situations, the NPV of such project turn positive due ...
Read MoreWhat is the importance of fixed Loan-to-Value Ratio?
Loan-to-Value RatioThe loan-to-value ratio (LTV) is a ratio of loan one wants to borrow to the appraisal value of property he or she can produce as a collateral.LTV is a measure of the capability of handling a loan and repay the interest and the principle in theoretical terms.Higher LTV value means more risk as the loan amount goes up but the repayment capability remains the same.LTV shows how much property a borrower of the loan actually owns to the real value of the property that was charged while the borrower bought the property.Lenders usually determine the risk associated with the ...
Read MoreWhat is Comparative Firms Approach of Valuation?
Under the comparative firms approach of valuation, companies are valued depending on groups formed with the key relationships of the companies. The groups of companies are formed with similar companies or similar transactions to determine the value of a firm. By deciding the group of company, the general trends are applied to each company of a group. Since the valuation is done by comparison, the approach is known as comparative firms approach.A Simple Approach in Evaluating a CompanyThe comparative firms approach is based on the fact that similar companies should have the same value and should sell for similar prices.It ...
Read MoreHow does subsidized financing affect the value of a project?
In the Adjusted Present Value (APV) approach, the after-tax subsidy is applied on after-tax cost of debt. That is, the company availing the financial subsidy gets a tax relief on their after-tax cost of loans. The debt of a company directly affects its value and hence the after-tax cost of debt also affects the company's finances. In fact, the companies get both savings in the tax paid as well as on the interest tax shield.Subsidized Financing Increases the Value of a ProjectA company paying 15 percent tax and receiving 5 percent subsidy will have to pay the interest at 10 ...
Read MoreDifference between Capital Cash Flow (CCF) and Adjusted Present Value (APV) Approaches
When we consider fixed debt ratio and debt rebalancing, both the interest shields and Free Cash Flows are discounted at the opportunity cost of capital of the project to determine the Adjusted Present Value (APV). So, one can combine these two flows and discount them by the opportunity cost of capital.Under Fixed Capital StructureSince FCFs plus interest tax shields equal the Capital Cash Flows (CCF), the CCF and APV approaches under fixed capital structure are the same. Under the assumption of fixed capital structure, CCFs, FCFs and APVs are all equal.The FCF value is widely used to determine the valuation ...
Read MoreHow to calculate the beta of an unlisted company? (Unlevering and relevering of beta)
One can easily obtain the beta of a company that is publicly quoted in the market. The beta is available in the peer group of companies and it can be obtained easily. The beta calculations are required to determine the required cost of capital of the companies. These betas are, however, required to be adjusted for the varying leverage. This adjustment of leveraging is done through leveraging and unleveraging of the beta.In determining the cost of capital via the Capital Asset Pricing Model (CAPM) in the context of valuation of corporate firms, it is stated that the cost of capital ...
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