Session 10.

Adjusted
Present Value Approach
EPGP, IIM INDORE
Adjusted Present Value (APV)
APV analyses financial manoeuvres separately and then adds their value to that of the business
APV = PV of the All Equity Firm + PV FSE
Value of the firm with no Leverage
◦ Evaluate the business as if it were financed entirely with equity
◦ Free Cash flows to firm discounted at the unlevered cost of equity

Add Financing side effects (FSE)

◦ Present Value of Interest tax-shields generated by raising a given amount of debt
◦ Eg., Present value of tax benefits in year 1 = (D*t*kd) /(1+kd)
APV contd.
No discount rate carries anything other than the time value of money and risk premium
◦ Wacc carries interest tax shields

APV unbundles the sources of value

◦ And thus provides, added managerially relevant information
◦ Easy to track down where value comes from

Complex, changing or highly leveraged capital structure (eg. LBO), APV is a better choice
References
Luehrman, T.A., 1997. ‘Using APV: A better tool for valuing operations’. Harvard Business Review.