Loan-to-Value RatioThe loan-to-value ratio (LTV) is a ratio of loan one wants to borrow to the appraisal value of property he or she can produce as a collateral.LTV is a measure of the capability of handling a loan and repay the interest and the principle in theoretical terms.Higher LTV value means more risk as the loan amount goes up but the repayment capability remains the same.LTV shows how much property a borrower of the loan actually owns to the real value of the property that was charged while the borrower bought the property.Lenders usually determine the risk associated with the ... Read More

Under the comparative firms approach of valuation, companies are valued depending on groups formed with the key relationships of the companies. The groups of companies are formed with similar companies or similar transactions to determine the value of a firm. By deciding the group of company, the general trends are applied to each company of a group. Since the valuation is done by comparison, the approach is known as comparative firms approach.A Simple Approach in Evaluating a CompanyThe comparative firms approach is based on the fact that similar companies should have the same value and should sell for similar prices.It ... Read More

In the Adjusted Present Value (APV) approach, the after-tax subsidy is applied on after-tax cost of debt. That is, the company availing the financial subsidy gets a tax relief on their after-tax cost of loans. The debt of a company directly affects its value and hence the after-tax cost of debt also affects the company's finances. In fact, the companies get both savings in the tax paid as well as on the interest tax shield.Subsidized Financing Increases the Value of a ProjectA company paying 15 percent tax and receiving 5 percent subsidy will have to pay the interest at 10 ... Read More

When we consider fixed debt ratio and debt rebalancing, both the interest shields and Free Cash Flows are discounted at the opportunity cost of capital of the project to determine the Adjusted Present Value (APV). So, one can combine these two flows and discount them by the opportunity cost of capital.Under Fixed Capital StructureSince FCFs plus interest tax shields equal the Capital Cash Flows (CCF), the CCF and APV approaches under fixed capital structure are the same. Under the assumption of fixed capital structure, CCFs, FCFs and APVs are all equal.The FCF value is widely used to determine the valuation ... Read More

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