APV - Adjusted Present Value Method The big thing about the APV method is that it takes the benefit of tax shields into account via the WACC, it takes them into account in the numerator. Basically, its whether you account for this in the numerator( APV Method) or Denominator (Basic DCF Method).

 
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The APV method separately values the operations of a firm from the benefits of its financing structure (i.e., tax-shields). This allows you to better understand where value is coming from.

For APV, you first value the firm as if it was an all-equity firm (using the unlevered cost of equity). This gives you the pure asset value of the company. You then value the financing side effects (both positve like tax-shields and negative like financial distress and bankruptcy costs) separately and add to the asset value to get the total value of the firm. This method is good to use if you expect the capital structure to change significantly over the forecasting period (thingk LBOs) since WACC assumes a constant capital structure.

What are deferred taxes? Deferred taxes arise because of differences in tax reporting and financial reporting for things like depreciation (MACRS for tax and straight line for books). Deferred taxes reconcile the difference.

 

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