ACCA P4 AFM Advance Financial Management

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ACCA P4
Advanced Financial Management (AFM)
高级财务管理
ACCA Lecturer: Lily Wang




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, P4 Chapter 4 Content


1 Introduction


2 The risk adjusted WACC


3 The adjusted present value(APV) technique


4 Analysis of Comprehensive Example




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, Chapter Summary

Beta revisited
• Asset beta-relfects pure systematic business risk
• Equity beta-reflects business and gearing risk
• Betas can be geard and ungeard:
Ve
 asset   equity 
Ve  Vd (1  T )



Investment Appraisal



Problems with the risk-adjusted WACC Adjusted present value model
• Can't cope if gearing ratio changed by Two-part approach:
project • Find base NPV
• Over-values tax shield where debt • PV of project flows using asset
not pernament beta in the CAPM
• Ignore costs of raising finance • Find PV of financing
• PV of issue costs on equity
• PV of issue costs on debt
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• PV of tax relief

, 1.Introduction

 Alternatives to the use of existing WACC as a discount rate in
project appraisal
 We have now established that the existing WACC should only be
used as a discount rate for a new investment project if the
business risk and the capital structure (financial risk) are likely to
stay constant. Alternatively,

 If the business riskof the new project differs from the entity's
existing business risk
 A risk adjusted WACC can be calculated, by recalculating the cost
of equity to reflect the business risk of the new project. (Degearing
and regearing beta factors)



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