What Does Adjusted Present Value Mean?

rjghmn's picture
Rank: Baboon | 110

An Adjusted Present Value (APV) valuation is very similar to DCF valuations, however there are several differences between the methodologies.

The APV is the net present value of a firm that is financed solely by equity, plus the present value of financing benefits.

APV = Unlevered NPV Cash Flows (Including Terminal Value) + NPV of Financing Side Effects (ex: Interest Rate Tax Shields)

Comments (21)

Sep 7, 2013

Always thought it was something the sell-side uses to triangulate a PO alongside an arbitrary EBITDA multiple and an industry average P/E

Sep 8, 2013

Hi BlackHat, I wanted to apologize for some of the mistakes I made in my article, it has been revised now. As far as your question is concerned I am not too familiar in regards to how APV is used on the sell-side.

Sep 8, 2013

So true. APV is just BS. Just a way that UChicago uses to differentiate itself. There are so many variables in APV that you can't back up concretely from financial statements

Sep 8, 2013

Yeah...APV is never used.

Sep 8, 2013

APV is hardly used but apparently they only use it when the capital structure changes alot...

Sep 8, 2013

Coincidentally, I was just reading Investment Valuation by my main man Aswath and the valuation seems to be purely academic.

Sep 8, 2013

Any one able to enlighten me as to why this is the case?

Sep 8, 2013

APV gives the same result no?

Sep 8, 2013

To get APV = WACC, you would need to calculate your WACC every period given the change in capital structure...

Sep 8, 2013

Basically you value your FCF at unlevered cost of capital to get the value of the unlevered firm and then adding the value from having leverage (interest tax shields) given the amount of debt each period. With WACC, you're assuming a constant capital structure throughout...

Sep 8, 2013

As Warren Buffet once said, "If you can eliminate the federal government as a 34% partner in your business, it's got to be worth more!"

Modigliani-Miller Theorem states that the value of the Levered Firm is equal to the Value of the Unlevered Firm plus the tax rate multiplied by the level of debt (AKA the PV of the Tax Shield).

For one, you have to assume the same level of assets in both scenarios to compare. Lets also assume that book value = market value and a 20% federal tax rate. So in your example above assume that the firm has $2,000 in assets. Scenario 1 is that the firm finances these assets with 100% stock. Scenario 2 lets assume 50% stock 50% debt. The value of the unlevered firm would be $2,000 and the value of the levered firm would be $2,000 plus (20%*$1,000 or $200). The "Tax Shield is the Tax Rate multiplied by the level of debt and is a value to the Equity Holders.

Unlevered Firm = $2,000 Equity
Levered Firm = $1,200 Equity + 1,000 Debt

If you want more info PM me.

    • 1
Sep 8, 2013

On (2) For APV you should use the same FCF as you would use for your regular DCF with WACC. The difference is that you will discount the FCF with the cost of unlevered equity (and not WACC) and that afterwards you add the effect of financing to arrive at the EV (except if you have weird stuff, it will only be discounting the interest tax shields that you calculate on the side, discounting them at the cost of debt)

Sep 8, 2013

Update:

I just tried a backtest of the formula and it failed miserably. I am wondering if there is a better formula I should be using or if I should make some sort of adjustment to the formula.

Sep 8, 2013

Are you discounting the future cash flows? If so, what rate are you using?

As an FYI, what you're getting is an enterprise value, not an equity value. So you're going to have to add cash and subtract debt to get to equity value. If you want to find equity value using the FCF method, you'll have to back out net interest expense from EBIT before multiplying by (1-t).

Your formula is correct. May want to add back stock-based compensation and other non-cash (amortization) expenses.

Sep 8, 2013

Since I'm using APV, I discount FCF by the CAPM cost of equity. I discount the interest tax shield by the cost of debt.

For the cost of equity, I use the 10 year treasury + beta times the 10 year market risk premium, as I plan on investing for a longer term. For the cost of debt, I use the 10 year bond for the company I am valuing. If no such bond exists, I use corporate bond spreads.

Sep 8, 2013
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Sep 8, 2013

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