What are Issue Costs?When companies raise money from the market, it needs to distribute securities in the market which requires the company to incur some cost. These one-time costs are called issue costs that have to be considered while the project begins. It is a preliminary cost all companies must spend to raise money from the investors in the market.How to Handle Issue Costs?Issue costs are handled at the outset of a project. The best way to manage the issue cost is to use the APV model to evaluate an investment project. In APV approach, the issue cost is discounted ... Read More

One can easily obtain the beta of a company that is publicly quoted in the market. The beta is available in the peer group of companies and it can be obtained easily. The beta calculations are required to determine the required cost of capital of the companies. These betas are, however, required to be adjusted for the varying leverage. This adjustment of leveraging is done through leveraging and unleveraging of the beta.In determining the cost of capital via the Capital Asset Pricing Model (CAPM) in the context of valuation of corporate firms, it is stated that the cost of capital ... Read More

The WACC concept assumes that debt is always a constant proportion of the value of a project. This means that with the changes in project value, the debt value must change to keep the WACC value as it is. For example, with a debt proportionality value of 60% for a project, the value of debt must remain 60% of the project value each year. This means that even with reducing project value, the amount of debt value should change in a proportion of 60%.Why Do We Need Debt Rebalancing?We need to tweak the debt proportion value in order to keep ... Read More

The WACC method is not directly used to determine the value of a project. However, the hurdle rate of a project can be determined by using WACC which can then lead to determine whether a project can be viable for a company to a new project. The underlying assumption in using the hurdle rate of a project includes the following.No Change in Capital StructureConstant capital structure means that the debt-to-equity ratio remains the same over the entire period of the project. In case WACC is to be used in determining the hurdle rate, then the capital structure should remain the ... Read More

The financing policies of a company usually need to be sustainable and feasible in the long term. Companies want to make decisions that may make financial policies more feasible and sustainable. The measures opted for this must ensure that the growth of the company is in sync with the policies set by the company. The policies that need to be followed for sustainable growth are included in the sustainable growth model of a company.Assumptions of Sustainable Growth ModelThe sustainable growth model aims to achieve long-term financial goals by managing the different elements of the model. The sustainable growth model is ... Read More

Like Free Cash Flow (FCF) and Capital Cash Flow (CCF), Adjusted Present value (APV) is another way of evaluating an investment project. However, it is completely different from FCF and CCF approaches.FCF and CCF are primarily related to interest tax shields and they do not consider the various financing effects that may affect the value of the investment project. In fact, most of the investment projects contain some form of financing effects and so Adjusted Present Value approach is a more utilized approach in practice.It is known that FCF approach of evaluating a project is good when the debt-to-value ratio ... Read More

The levered cost of equity represents the risk components of the financial structure of a firm. To finance the projects of a firm, companies often need to resort to debt that is collected from the market. The market offers the debt by the resources of the investors.In case of levered cost of equity, the firms have larger debt proportions, and hence the firms must convince the investors that it is capable to provide the business and financial risk premiums.In general, when a company uses unlevered cost of equity, it does not go for debts from the market. It uses the ... Read More

Capital Cash Flow (CCF) is a unique approach to calculate the worth of an investment project. In deciding the value of a project, there are two scenarios in which the CCF approach may be calculated. While there are some basic differences in these two approaches, the result obtained using these approaches are the same. These two scenarios are: fixed debt and fixed debt-to-value ratio.The CCF method differs from the Free Cash Flow (FCF) method in the sense that in FCF, the interest tax shield is applied in the discount rate rather than on the cash flows of the firm. The ... Read More

The Adjusted Present Value (APV) approach can handle both perpetual and uneven cash flows. It can be used in calculating the adjusted present value of a levered firm that has many financing effects. The APV approach divides the NPV into two basic parts −The first part includes the all-equity NPV, assuming that the project is entirely financed by equity.The second part consists of the interest tax shields and all types of financing effects.We can write, $$\mathrm{APV = All\:Equity\:NPV\:+\:Value\:of\:Financing\:Effects}$$Steps in Adjusted Present Value ApproachThe use of APV consists of three steps −The first state of application of APV includes determination of ... Read More

Apart from Earning Per Share (EPS), value, and cash flow, there are additional factors that need to be considered while determining the capital structure of a company. Some of the most common factors are as follows −AssetsIf a company has more tangible assets, its chances of financial distress automatically goes down. Lenders can use the tangible assets to realize their funds by liquidating the assets in the case the company goes bankrupt. Hence, companies that do not have many tangible assets have debt at a costlier rate.Growth OpportunitiesThe companies with higher market-to-book value have a larger share of intangible assets ... Read More