ACCAspace
Provided by
ACCA Research Institute
ACCA P4
Advanced Financial Management (AFM)
高级财务管理
ACCA Lecturer: Lily Wang
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com
, P4 Chapter 4 Content
1 Introduction
2 The risk adjusted WACC
3 The adjusted present value(APV) technique
4 Analysis of Comprehensive Example
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com 2
, 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
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com 3
• 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)
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com 4
Provided by
ACCA Research Institute
ACCA P4
Advanced Financial Management (AFM)
高级财务管理
ACCA Lecturer: Lily Wang
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com
, P4 Chapter 4 Content
1 Introduction
2 The risk adjusted WACC
3 The adjusted present value(APV) technique
4 Analysis of Comprehensive Example
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com 2
, 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
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com 3
• 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)
ACCAspace 中国ACCA特许公认会计师教育平台 Copyright © ACCAspace.com 4
