Corporate Finance Capital Budgeting doubt

CFA Level II
#1

Hi,

This is with reference to the question set 33-38 in Corporate Finance book Reading 29 Capital Budgeting (similar case of Granite corporation mentioned in text).

The company’s NPV is 244,054. As mentioned, it has 50 % debt/value ratio, so the liabilities is 122,027. The Assets are 200,000 (the investment in new project), so the net worth (which is basically equity as there are no free reserves) is 200,000-122,027 = 77,973.

Question 36 asks us the value of equity at time 0 and calculates the present value of dividend/repurchases as given in the table as 122,027. Does it not contradict the value of 77,973 obtained above? Am i missing something here?

Also, since debt is 50% of value, equity must be the other 50%, so it automatically should be 122,027.

Please help me in understanding the gap in my understanding.

Regards,

#2

Hi, Could anyone help me out with this? cpk, could you help me?

#3

Hi, If I understood this correctly, you are mixing up market value with book value of equity. Book Value at Time0 - is 77 973 or the Net worth, based on the balance sheet of the company. The question asks for the Market Value of Equity at time 0 (claims valuation method), which could be different than the balance sheet Net Worth. I hope this helps