Use APV When Financing Side Effects Are Large
Calculate an adjusted present value by separating operating value from financing effects.
A transaction has unlevered operating value of $290 million. The present value of expected interest tax shields is $28 million. Financing fees are $5 million. Expected distress and lost-flexibility cost is estimated at $9 million. APV = unlevered operating value + PV of financing benefits - PV of financing costs. The common trap is to lower WACC for debt and never show how much value comes from the tax shield versus how much value is lost to fees and fragility. Start with unlevered value Operating value without financing effects = $290M. This isolates what the assets are worth before the…
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