Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Two – WACC – Forty years on
Exhibit 2.19: APV/WACC – risk free debt
WACC reconcilliation – Risk free debt
Row Unleveraged value Notes
1 Rf 4.00% Risk free rate
2 MRP 3.50% Market risk premium
3 B A 0.8 Asset Beta
4 K A 6.80% Unleveraged cost of equity
5 FCF 100 Free cash flow
6 g 3.00% Growth
7 V A 2,632 Value with no tax shelter
Leveraged APV
8 BV D 1,000 Book value of debt
9 V D 1,000 Market value of debt
10 DRP 0.00% Debt risk premium
11 I 4.00% Interest rate
12 t 30.00% Tax rate
13 K D *(1-t) 2.80% Net cost of debt
14 TS 12 Tax shelter
15 V TS 316 Tax shelter valued at unleveraged cost of
equity; not cost of debt
16 V A+TS 2,947 Value including tax shelter
17 DR 0 Default risk
18 V F 2,947 Value including tax shelter and default risk
WACC/DCF value
19 V D /V F 33.93% Weighting of debt derived
iteratively=weighting from APV
20 V D /V E 51.35% Debt/Equity
21 B D 0.0 B D =(I-R F )/MRP
22 B L 1.2 B L =B A *(1+V D /V E )-B D *V D /V E ; not
B A *[1+V D /V E *(1-t)]-B D *V D /V E *(1-t)
23 K E 8.24% Leveraged cost of equity
24 WACC 6.39% Conventional weighed average
25 V F 2,947 WACC=APV
26 WACC 6.39% WACC = K A - I*t*V D /V F
The unleveraged cost of equity in row 4 is calculated using the cost of equity
formula discussed above. All the values are derived using the Gordon Growth
model:
V = CF t+1 / (k-g)
where V=value, CF t+1 =next year’s cash flow, k=discount rate and g=growth rate.
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