Does the APV-method and WACC-method really yield the same results? Crack a case
Dear all,
Currently, I am doing a valuation case and need to have some clarifications on a couple of issues.
Outline of case:
Initial investment of 100 at t0 (present) yields the following cash flows : -20 (T1), 0 (T2), 80 (T3), 150 (T4)
Cash flows materialize at end of year (year-end convention). The unlevered cost of equity is set at 12% and the cost of debt is 8% and tax is 35%.
Q1: Calculate the value of the project assuming 100% equity financing. - Check (discount back to present with cost of equity)
It is then assumed that the project can be financed with a mix of equity and debt. The desired capital structure is 60/40 (E/D). The capital structure has no influence on the value of the project, only the tax retention is included in the value (Miller & Modigliani).
- What changes will occur in the cost of capital? - check (calculate levered cost of equity and calculate wacc, discount back to the present with wacc)
- Under this assumption, what will be the value of the project? - check
- What are your views on the fundability of the project under these assumptions? (debt is cheaper, value of project is higher etc etc)
On closer inspection, the provider of the loan capital does not wish to finance from T0. The following structure will be established: € 60 will be borrowed on T1, which will be repaid on T2 and T3 in equal instalments of € 30.
- Calculate the value of the project under the above conditions.
- Use a calculation to show that the APV value (calculated under 5) is equal to the value based on a WACC.
Questions 5 and 6 do not seem to add up. No matter what method or technique (unlever and relever, change cap structure, the values are not equal). Anyone has experience with projects where the issuance of debt is done after financing the project? Aside from the information stated above, there is no other relevant information available.
If anyone can point me in the right direction, please let me know.
Many thanks in advance.
