Potentially useful formula

Valuation

Calculating the present value of a depreciation tax shield

1. Straight line – calculate the annual depreciation tax shield (= annual depreciation expense* T C ),
value the result as an annuity

2. Using CCA – assuming the asset will be sold at the end of the valuation period for its UCC

For each asset class complete the following PV CCA TS = INV*d* TC * 1 + .5k - SVN*d*Tc___
d+k 1+k (d+k)*(1+k)N

where
INV = cost of capital asset
SV or Terminal = the proceeds from sale when an asset is sold
d = maximum CCA rate allowed by CRA for an asset class
TC = corporate tax rate
k = appropriate discount rate to use in the present value calculations
N = the end of the year in which the asset is sold, in FNCE 447 always assume the asset is sold
after taking CCA for year “N”.

Interest rates/CAPM/β

levered kE = kA + (kA-kD)D/E Where

kE = kRF + βE(kM - kRF) kA = cost of capital for the asset βA = beta of an asset
βA= βE * E/V kD = cost of debt βE = beta of equity
WACCunadjusted = kM = market return D/E = value of debt/value of equity
kD(D/V) + kE(E/V) (TSX/S&P composite or S&P 500)
WACCtax adjusted = kE = cost of equity D/V = value of debt/(value of debt +
kD(1-Tc)(D/V) + kE(E/V) value of equity)
kRF = risk free return E/V = value of equity/(value of debt +
value of equity)

Real rate = 1 + nominal rate – 1

1 + inflation

APV = VU + PVInt TS + PVAtx other financing effects