Wecomputethevalueoftheleveredfirmatdifferentlevels
of debt. The debt level that maximizes the value of the
levered firm is the optimal debt ratio.
ILLUSTRATION 6.10: Using the APV Approach to
Calculate Optimal Debt Ratio for Titan Cement
Thisapproachcanbeappliedtoestimatingtheoptimalcapital
structureforTitanCement.Thefirststepistoestimatethe
valueoftheunleveredfirmfromthemarketvalueofthefirm
today.Wecomputethepresentvalueofthetaxsavingsfrom
theexistingdebt,assumingthattheinterestpaymentsonthe
debt constitute a perpetuity.
Based on Titan’s current rating of AA, we estimate a
probability of bankruptcy of 0.28% from Table 6.1. The
bankruptcycostisassumedtobe 30 percentoftheunlevered
firm value.
17
Sincethe market value ofthe firmtodayis 2,355 million
euros, we can estimate the value of the unlevered firm:
While we use the standardapproach of assuming that the
presentvalueiscalculatedoveraperpetuity,wereducethe
taxrateusedinthecalculationifinterestexpensesexceedthe