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    Question

    A project will be financed with a mix of equity and a

    concessional government loan carrying interest below market and a partial guarantee fee. The project also yields interest tax shields and has expected flotation costs. Risk is project-specific and different from the firm’s existing assets. Which valuation framework most appropriately captures these features?
    A WACC using current firm capital structure and market rates Correct Answer Incorrect Answer
    B Dividend Discount Model with adjusted growth Correct Answer Incorrect Answer
    C Adjusted Present Value (APV) separating unlevered value, tax shields, subsidies, and issue costs Correct Answer Incorrect Answer
    D Residual Income model ignoring financing side effects Correct Answer Incorrect Answer
    E NPV using book WACC and including subsidy as negative cost Correct Answer Incorrect Answer

    Solution

    APV isolates the base unlevered project value and then adds present value of financing side effects—tax shields, concessional loan subsidies, guarantee/issue costs—ideally suited when financing is non-standard and project risk differs from the firm’s average.

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