ACCA Strategic Professional · Advanced Financial Management · Impact of financing on investment decisions and adjusted present values
A company uses APV to appraise a project financed by newly issued debt. Which of the following is a financing side effect that should be included in the APV calculation?
The present value of tax savings on interest from the new debt is included. APV adds financing side effects such as tax shields, issue costs and subsidies to the base-case NPV. Dividends, principal repayments and gearing-driven required returns are not added because the base case uses the ungeared cost of equity.
- AThe present value of tax savings on the interest paid on the new debtCorrect
- BDividends expected to be paid to the company's existing shareholders
- CThe extra return shareholders demand because of the project's gearing
- DThe principal repayments on the new debt
Explanation
APV adds the value of financing side effects, such as tax shields on interest, issue costs and subsidised loan benefits, to the base-case NPV. Gearing-related return changes are already excluded because base-case flows use the ungeared cost of equity. Dividends and principal repayments are financing flows, not side effects, and are not included as separate adjustments.
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