Chapter_06_APV - Instructors: Please do not post raw...

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Click to edit Master subtitle style Chapter 6 Frameworks for Valuation: Adjusted Present Value (APV) Instructors: Please do not post raw PowerPoint files on public website. Thank you! 11
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Model Measure Discount factor Assessment Enterprise discounted cash flow Free cash flow Weighted average cost of capital Works best for projects, business units, and companies that manage their capital structure to a target level. Discounted economic profit Economic profit Weighted average cost of capital Explicitly highlights when a company creates value. Adjusted present value Free cash flow Unlevered cost of equity Highlights changing capital structure more easily than WACC-based models. Capital cash flow Capital cash flow Unlevered cost of equity Compresses free cash flow and the interest tax shield in one number, making it difficult to compare operating performance among companies and over time. Equity cash flow Cash flow to equity Levered cost of equity Difficult to implement correctly because capital structure is embedded within the cash flow. Best used when valuing financial institutions. Adjusted Present Value There are five well-known frameworks for valuing a company using discounted flows. In theory, each framework will generate the same value. In practice, the ease of implementation and the interpretation of results varies across frameworks . In this presentation, we examine how to value a company using adjusted present value (APV) Frameworks for Valuation 22
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Why Use APV? When building an enterprise DCF or economic-profit valuation, most financial analysts discount all future flows at a constant weighted average cost of capital (WACC). Using a constant WACC, however, assumes the company manages its capital structure to a target debt-to-value ratio. In cases where the capital structure is expected to change significantly , assuming a constant cost of capital can lead to misvaluation. In these situations, do not embed capital structure in the cost of capital, but instead model capital structure explicitly. The adjusted present value (APV) model separates the value of operations into two
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This note was uploaded on 06/06/2011 for the course FINA 4210 taught by Professor Staff during the Spring '08 term at University of Georgia Athens.

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Chapter_06_APV - Instructors: Please do not post raw...

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