Adjusted Present Value (APV) Approach

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APV Example Assume: Asset beta = 0.7 Long Term Treasury = 6% Market Premium = 7.8% From CAPM, Discount rate = .06 + .7*.078 = .1146 Also assume: Terminal value = (approx.) 7 x FCF Step 1: Year: 1 2 3 4 5 EBIT 100 108 116 124 134 Tax @ 40% 40 43 46 50 53 Capex 30 32 35 37 40 Depreciation 20 22 24 26 28 Increase in NWC 20 22 23 25 27 FCF 30 33 36 38 41 Terminal Value 287 PV@11.46 27 26 26 25 24 167 Total PV 295
APV example (continued) Step 2: Calculate value of tax shield. Assume $150 of debt at 8% (pretax) initially outstanding & is repaid from available cash flow Year: 1 2 3 4 5 EBIT 100 108 116 124 134 Interest (=outstanding debt*.08) 12 10 8 6 3 Profit before tax 88 98 108 118 131 Tax 35 39 43 47 52 Profit after tax 53 59 65 71 79 Capex 30 32 35 37 40 Depreciation 20 22 24 26 28 Increase in NWC 20 22 23 25 27 Cash flow available to pay down debt 23 27 31 35 40 Ending Debt = (beginning debt – pay down) 127 101 70 35 0
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Adjusted Present Value (APV) Approach

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