# Corporate Finance

A) Calculate APV.

APV = NPV + PV of debt tax shield

NPV = PV of cash flows - initial investment

Initial Investment 10,000,000

Cash flows 1,750,000

Period 10 years

Discounting rate12%

PV of cash flows 9,887,890 using the PV function

NPV (112,110)

We now calculate the PV of debt tax shield

Year Debt Outstanding at Start of Year InterestInterest Tax ShieldsPresent Value of Tax Shields 1 5,000,000 400,000 140,000 129,630

2 4,500,000 360,000 126,000 108,025

3 4,000,000 320,000 112,000 88,909

4 3,500,000 280,000 98,000 72,033

5 3,000,000 240,000 84,000 57,169

6 2,500,000 200,000 70,000 44,112

7 2,000,000 160,000 56,000 32,675

8 1,500,000 120,000 42,000 22,691

9 1,000,000 80,000 28,000 14,007

10 500,000 40,000 14,000 6,485

Total 2,200,000 770,000 575,736

NPV (112,110)

PV of debt tax shield 575,736

APV 463,626

B) How does APV change if the firm incurs issue costs of $400,000 to raise the $5 million of required equity?

With flotation cost , APV = NPV + PV of debt tax shield - flotation cost Flotation cost 400,000

APV 63,626

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