Value of investment incorporating the tax shields

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Reference no: EM131049685

The WACC, APV and FTE methods (described in Chapter 18) determine the value of an investment incorporating the tax shields associated with leverage. However, some other potential imperfections are associated with leverage:

1) Issuance and other financing costs (underwriting fees for example)

2) Security mispricing

3) Financial distress and agency costs

How do the previous three imperfections affect the valuation and your decision to invest? Where is going to be reflected the imperfections in the three methods (APV, WACC and FTE)?

Hint: APV and WACC are two methods that organize the data (cash flows) in different order but reach the same value. So, try to contrast these two methods.

Reference no: EM131049685

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