APV-method

Hey chimps,

I'm struggling with intuition behind the APV-method of valuing a firm as the sum of 1) the value of the unlevered firm plus 2) the present value of the tax shield from debt financing plus 3) potential bankruptcy costs. Would anyone care to explain why the actual interest expenses are not included in the calculation if the intention behind the APV-method is to isolate and illustrate the total effect of debt? Seems inconsistent to consider the tax shield, and not the interest expenses that cause the tax shield, but I might be missing something.

Many thanks,
BD Elliot

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