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Answers - Chapter 18
Answers - Chapter 18
Answers - Chapter 18
Answers for Problems in Chapter 18
1. The textbook discounts the depreciation tax shields (DTS) at Risk‐free rate/ cost of debt while we
used Ku for the same. This way we are being consistent with WACC‐ valuation method. So, if you re‐
work these problems with Kd or Rf for discounting the DTS, your answers will match those in the
textbook.
2. Here financial policy is static, meaning debt ratio remains the same which implies periodic debt
rebalancing. So the debt amount is a function of firm's value and the tax shields are as risky as CFs
from operations. Hence, we will have to discount the Tax shields at Ku and the applicable
(un)levering equation is:
However, the text book uses the following (un)levering equation is:
Hence the deviation is our answers is on account of the difference in levering equations. Assuming
the project is financed with $9.3 mn debt and the rest with equity we get the APV as $ 3642891.385.