advanced finance management adjusted present value (apv) · 2020-07-02 · ©acca next steps step...

Advanced Finance Management

Adjusted PresentValue (APV)

冯淇

浙江工商大学

22nd June, 2020

©ACCA

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

APV

Value of the project as if it were

financed entiely with equity

Interest tax shields

Subsidies

Issue costs

Other costs

Base-case value

Value of all financing

side effects

Investment Decision

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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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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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 https://cn.accaglobal.com/trainee/c61/free-online-course/sp-practice-videos.html for more details

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https://cn.accaglobal.com/trainee/c61/free-online-course/sp-practice-videos.html

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