Did not find any "place" for this question, but hopefully someone will be able to give me some help with this.(adsbygoogle = window.adsbygoogle || []).push({});

corporate tax: Tc= 25%

return on debt: rD=4%

return on assets = rA= 10%

Debt as amount of total value: D/V = 0.6

Equity as amount of total value = E/V = 0.4

A perptual cashflow before tax: 1 000 0000 (per year)

I'm trying different ways of finding the value of this cash flow.

The first I do is finding the WACC after tax, which I find to be 9,4%

This gives a present8 value of: 1000 0000*(1-0.25)/0.094 = 7 978 723, and this gives a Debt of 0.6*7 978 723 =4 787 234

However, we are supposed to do this with a an APV-approach, where we use the rA which is equal to the return on equity with no leverage (WACC without tax),

the new approach is: 1000 000*(1-0.25)/0.1 + D*Tc where the last part is the present value of the tax shield. the new equation, using the debt (D) I found from the WACC-solution is: 1000 000*(1-0.25)/0.1 +4 787 234*0.25 = 8 696 809

But this is not the same as I found using WACC after tax

What am I doing wrong?

Thanks

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# Homework Help: Adjusted present value, finance, economics

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