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FNCE100 Quick Guide
FNCE100 Quick Guide
or
VL =
(= RWACC w/ no taxes)
= risk or volatility
equity = asset(1 +
s = v + (1 - tc)( v - B)
firm =
B +
S or firm =
U +
- Forward Rate: given an 8% 1-year spot rate and a 10% 2-year spot rate:
(1.10)2 = (1.08) * (1 + f2)
fn =
-1
APV Approach - adjusted present value: APV = NPV + NPVF = NPV + tc*B
- Value of a project = Value of project to unlevered firm + Financing Side Effects
- tax subsidy to debt (largest effect)
- costs of issuing new securities
- costs of financial distress
- subsidies to debt financing
(numerator = LCF)
- Initial Investment
Suggested Guideline:
- Use WACC or FTE if the firm's target debt-to-value ratio applies to the project over its life
- Use APV if the project's level of debt is known over the life of the project
Rs = (Riskless Interest Rate) + (Beta)(Market Risk Premium)
- Flotation costs are paid immediately but deducted from taxes by amortizing on a straight-line over the
life of the loan
- These amortized flotation costs create a tax shield