Adjusted present value

The Adjusted Present Value method is one of the discounted cash flow method of the corporate or project evaluation.

Overview

The APV method counts - as the WACC or the TCF approach - the method of the Entity DCF valuation. Under this method, the value of a company's equity by subtracting the net debt of the company's total value (Entity Value) is determined.

The individual entity -based evaluation methods differ with respect to the assumed financing policy and the treatment of the tax benefit from debt financing of the company.

The purpose of the discounted cash flow method is an exact (quantitative) determination of the tax Vantage from a pro-rata debt financing. Now the amount of the tax Vantage depends on the financing policy of the company. In many cases, only a corporate tax (ie, for example, a corporation or business tax ) even if such a taxation of the shareholders is neglected.

If now further assumed that the company has a so-called autonomous financing operates ( in an autonomous financing of future repayment or re-recording of debt in the entire future is already specified exactly, deviations or other uncertainties are excluded ), then, the use of APV approach to (Adjusted Present Value ). The use of the APV approach is tied to the condition of an autonomous financing - the company is funded differently than autonomous, then the correct value of the company is not the same as the APV value.

Equation

With:

  • Total capital market value of the indebted enterprise
  • Total capital market value of the company's undeserved
  • Height of the ( risk-free ) debt at time t
  • (Corporate ) tax rate based on the cash flow
  • Risk free rate

The APV method determines the tax benefit from the proportional debt financing. This tax advantage arises from the difference in value of a debt and involuntary company. But that presupposes the APV method that you know the market value of the company and also the involuntary involuntary cost of equity. This cost of equity Determine typically consists of a so-called peer group, ie from other companies in the same business area. CAPM and APT help to identify meaningful cost of equity.

Capital Asset Pricing Model
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