# Using the Adjusted Present Value Approach on Holmen AB Case Solution

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In order to find out the present value of the free cash flows at the unlevered cost of equity, it is necessary to find out the levered beta first. The formula for the calculation of unlevered beta is as follows:

Unlevered Beta (Bu) = Levered Beta / (1+ (1-Tc) D/E)

## Case Analysis for Using the Adjusted Present Value Approach on Holmen AB

According to the share data available on the website of the company, the most recent levered beta for the company is 0.7. The tax rate applicable for this purpose is the Holmen’s domestic statutory tax rate of 26.3%. The balance of the company shows that the total liabilities value for the year 2012 remained 16,233 MSEK while the total equity value for the company was 20,813 MSEK. Thus, by dividing the debt value by the equity value, D/E came out to be 78%. Thus using the values of levered beta, tax rate and the debt to equity ratio value, unlevered beta can be found out as follows:

Unlevered Beta (Bu) = Levered Beta / (1+ (1-Tc) D / E) = 0.7 / (1 + (1-26.3%) * 78%) = 0.44

The 10-year Treasury bond rate for Sweden was used as the risk-free rate in order to find out the unlevered cost of equity. The 10-year Treasury bond rate remained around 2.192%; whereas, the market return remained around 11%. Using this data, unlevered equity return can be found out as follows:

Unlevered Equity Return = Rf + Bu*(Rm – Rf) = 2.19% + 0.44 * (11% - 2.192%) = 6.11%

In order to find the annual tax shield from the interest expense, multiply the tax rate with the interest expense for that financial year given in the income statement. For simplicity, it has been assumed that the years 2013 and 2014 have the same interest expense as in the year 2012. The present value of the interest tax shield can be found out by discounting the tax shields at the unlevered cost of equity. The total present value of the tax-saving comes out to be around 463 MSEK, when added to the total present value of free cash flows, gives the Adjusted Present Value of around 1,989 MSEK. If this exercise is repeated by assuming that the Debt to Equity Value is increased by 30%, the annual interest expense has to be adjusted to find out the new Adjusted Present Value for the company. The net debt to equity ratio for the company, when increased by 30%, comes out to be around 1.01.

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