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Ch_016

Ch_016

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Published by Akash saxena

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Categories:Types, School Work
Published by: Akash saxena on Dec 22, 2010
Copyright:Attribution Non-commercial

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12/22/2010

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Chapter-16
Valuation andFinancing
 
By
Akash Saxena
Chapter Objectives
U
nderstand the relationship between leverage, betaand the cost of capital.
Explain the unlevering and levering of beta for calculating the cost of capital.
Discuss the utilit
y
and limitations of WACC inevaluating an investment project.
Compare the free cash flow (FCF) approach and thecapital cash flow (CCF) approach of investmentevaluation.
Focus on the advantages of using the adjusted presentvalue (APV) approach in project evaluation.
Explain the methodolog
y
for determining the value of the firm and the value of equit
y
.
 
By
Akash Saxena
A
sset Beta
T
he
unlevered beta
is a measure of the business risk of thefirm.
 A firm has a portfolio of assets, and therefore, the asset betaof a firm,
 F
a
is the weighted average of betas of individualassets.
 Average asset beta = beta of asset 1
v
weight of asset 1 + betaof asset 2
v
weight of asset 2 +«+ beta of asset
n
v
weight of asset
n.
 A firm¶s assets are generall
y
financed b
y
debt and equit
y
.
T
herefore, a firm¶s asset beta is also equal to the weightedaverage of the firm¶s equit
y
beta and debt beta. Assuming nocorporate tax, the beta of assets will be as follows:
a e
 E DV
 F F F!

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