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?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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