lecture 2 Adjusted Present Value Method in Finance

A comprehensive set of flashcards covering key concepts about Adjusted Present Value, WACC, financing effects, and project evaluations.

What is WACC in simple words?

It is the average price the company pays for all the money it uses.

What is Debt?

Debt is money the company borrows from someone else and must pay back later.

What is Equity?

Equity is money that comes from the owners of the company.

What is a Tax Shield?

It is like a special coupon that saves the company money on taxes because they have a loan.

How do you find the Tax Shield amount?

Multiply the interest by the tax rate: Interest \times Tax \text{ Rate}

What are Issue Costs?

These are fees the company pays to experts to help them find or sell money.

What is the Base Case NPV?

The value of a project if the company only used its own money with no loans.

What does APV stand for?

It stands for Adjusted Present Value.

What is the formula for APV?

Base \text{ Case NPV} + \text{Financing Effects} = APV

What are Financing Effects?

The total of the money saved from tax shields minus the money spent on fees.

What is a Beta (\beta)?

A number that shows if a project is safe or risky compared to other projects.

What is Leverage?

Using borrowed money to try and make even more money, which makes it riskier.

What is Residual Value?

The money the company gets by selling its machines or tools at the end of the project.

What does a positive APV mean?

It means the project is a good deal and the company should do it.

What are Agency Costs?

Money wasted when the people in charge do not agree with the owners about the plan.

How do you find the cost to sell shares?

Multiply the fee percentage by the total money needed: Money \text{ Needed} \times Fee \% = \text{Issue Cost}

Wait, why use APV instead of WACC?

APV is better when the amount of borrowed money changes a lot over time.

In the Hyde PLC story, how long was the project?

The project lasted for 10 years.

In the Hyde PLC story, how much money was needed?

They needed 2.3 million at the very start.

What was the tax rate in the Hyde PLC example?

The tax rate was very high at 90\%.

What happens if the APV is a negative number?

The project is a bad idea because it will lose money.

What is the 'all equity' rate?

It is the cost of using only the owners' money to pay for things.