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Finance · level 3

Adjusted present value

Value the business as if all-equity, then add the financing side effects separately. Cleaner than WACC when the debt schedule is known in dollars.

Theory: Corporate Finance 

Worked example: Next year's FCF $33M growing 1% forever, unlevered cost of capital 8%. The firm will carry $230M of permanent debt; tax 20%. Adjusted present value?

V_U$471.43M
PV(tax shield)$46M
APV$517.43M

Step by step

  1. 1

    Unlevered value

    $33M / (8% − 1%) = $471.43M

  2. 2

    PV of tax shield

    τ × D = 20% × $230M = $46M

  3. 3

    APV

    $471.43M + $46M = $517.43M

  4. 4

    When to use APV

    Debt that is fixed in dollars (LBOs, project finance) rather than a constant fraction of value. Subtract issuance and distress costs if material.

Next year's FCF $33M growing 1% forever, unlevered cost of capital 8%. The firm will carry $230M of permanent debt; tax 20%. Adjusted present value? = 517,428,571

The theory behind it

Intuition

Finance is time and risk applied to cash: move every cash flow to the same date at a rate that reflects its risk, then compare.

Common pitfalls

  • ×Discounting a nominal flow at a real rate (or vice versa).
  • ×Mixing enterprise-value and equity-value numbers in the same ratio.

In the interview

Valuation, WACC, LBO and accretion rounds — where a wrong bridge is a wrong answer.