Adjusted Present Value (APV) Approach

More documents

Recommendations

Info

APV Example (step 2 continued) Compare tax payments with vs. without debt. The difference equals the tax savings available from the interest deduction (tax shield). Discount tax savings at pre-tax rate of return on debt* Tax payments with no debt 40 43 46 50 53 Tax payments with debt @ 8% 35 39 43 47 52 Tax savings 5 4 3 3 1 PV of tax savings @ 8% $13 * assumes risk of tax shields being realized = risk of debt
APV example: non-interest tax shields Suppose in addition there is a tax loss carryforward of $100 million. This means that the first $40 million of taxes need not be paid. Year Tax savings Taxable Income Used 1 35 87.5 2 5 100 PV of tax savings @ 8% $37 Present value these savings at 8%, produces a value of 37 for the tax loss carryforward. Conclusion: Total firm value = value of all equity firm (295) + side effects of financing (13 + 37) = 345.
Page 1 and 2: Adjusted Present Value (APV) Approa
Page 3 and 4: APV procedure 1. Calculate value of
Page 5: APV example (continued) Step 2: Cal
Page 9: RJR Nabisco buyout

Adjusted Present Value (APV) Approach

Create successful ePaper yourself

Delete template?

Save as template?