Enterprise Valuationadvanced

Adjusted Present Value (APV)

Adjusted present value (APV), introduced by Myers (1974), values a firm as the unlevered value of its operations plus the value of its financing side effects. First value the business as if it were all-equity, discounting unlevered free cash flow at the unlevered cost of equity. Then add the present value of financing benefits, chiefly the interest tax shield, valued separately. APV shines where the WACC struggles, namely when capital structure changes over time, because it never bakes a fixed debt ratio into the discount rate. Instead it states operating value and financing value as two transparent pieces.

Try it yourself

Adjusted present value

Value the business as if all-equity, then add the financing benefit separately: V_u = FCF₁ / (k_u − g) plus PV(tax shield) = T·D gives APV = V_u + PV(shield). The shield is the tax saved on deductible interest. More debt means a larger shield, so long as you ignore distress costs.

Adjusted present value (APV)$148.3m

Unlevered value V_u $133.3mPV(tax shield) = T·D $15.0mAPV $148.3m

Unlevered FCF₁ (year 1)$12.0m

FCF growth g2.0%

Unlevered cost of equity k_u11.0%

Debt level D$60m

Tax rate T25%

Cost of debt k_d6.0%

The business alone is worth $133.3m. Financing with $60m of debt adds a tax shield worth $15.0m (the annual saving $0.9m = T·k_d·D, capitalised), so APV is $148.3m. The shield is 10% of the total. APV keeps these two visible; WACC would hide the shield inside a lower discount rate.

Try this

With no debt the gold block disappears and APV collapses to V_u. Push the debt slider up and watch the gold shield grow. In reality the rising chance of financial distress eventually offsets the shield, so more debt is not free value.

Reflect: APV adds the shield as a separate term, while WACC lowers the discount rate to bake the shield in. For a perpetual fixed debt level the PV of the shield is simply T·D, discounted at the cost of debt k_d. If the firm instead rebalances debt to a constant ratio, the shield carries the business risk and is discounted at k_u. Which convention fits a real company better, a fixed debt schedule or a target leverage ratio?

Why it matters

WACC hides the benefit of debt inside the discount rate, which only works cleanly if the debt ratio stays fixed forever. The slides show why that breaks down. A firm that moves from 10 percent debt today toward 40 percent in five years does not have one constant WACC. APV solves this by pulling the two effects apart. Value the operations with no debt at all, then add the financing perks on top. Because each piece is visible, you can let leverage change year by year and still value it honestly, which is why APV suits leveraged buyouts and recapitalisations.

Formulas

The APV identity

\text{APV} = V_{\text{unlevered}} + \text{PV(financing side effects)}

The value of the all-equity firm plus the value created or destroyed by how it is financed. The dominant side effect is the interest tax shield from debt.

Unlevered value and the dominant side effect

\text{APV} = \displaystyle\sum_{t=1}^{\infty} \dfrac{\text{FCFF}_t}{(1 + r_U)^t} + \displaystyle\sum_{t=1}^{\infty} \dfrac{\tau_c\, r_d\, D_t}{(1 + r_d)^t}

Here r_U is the unlevered cost of equity, FCFF is unlevered free cash flow, and the second sum is the interest tax shield, with corporate rate tau_c, cost of debt r_d and debt level D.

Worked examples

Scenario

A project has an unlevered value of US$120m. It carries US$50m of debt at a 6 percent cost with a 25 percent corporate tax rate, and the firm treats the debt as fixed, discounting the shield at the cost of debt. What is the APV?

Solution

The annual interest tax shield is the tax rate times interest, that is 0.25 times 6 percent of US$50m, which is US$0.75m a year. Treated as a perpetuity discounted at the 6 percent cost of debt, its value is US$0.75m over 0.06, which is US$12.5m. Equivalently the shield equals the tax rate times the debt, 0.25 times US$50m. APV is the unlevered value of US$120m plus the shield of US$12.5m, which is US$132.5m. The financing decision added US$12.5m on top of the all-equity value.

Common mistakes

✗APV and WACC must give different answers. With a constant debt ratio and consistent assumptions they agree. APV simply makes the financing effect explicit rather than hiding it in the rate.
✗APV discounts operating cash flow at the WACC. The unlevered cash flow is discounted at the unlevered cost of equity, because the operating value is computed as if the firm had no debt.
✗APV only counts the tax shield. The tax shield is the main side effect, but APV can also include issuance costs, subsidised financing and distress costs.
✗APV is just a harder version of WACC. Its advantage appears precisely when leverage changes over time, where a single WACC would misstate value.

Revision bullets

•APV is unlevered value plus the value of financing side effects (Myers 1974)
•Value the firm as all-equity, then add the financing benefits
•Unlevered cash flow is discounted at the unlevered cost of equity
•The interest tax shield is the dominant side effect
•APV handles a changing capital structure that WACC cannot
•With a fixed debt ratio APV and WACC agree

Quick check

The APV approach values a firm as

APV is especially preferred over a single WACC when

Connected topics

WACC Levered Beta Enterprise DCF Tax Shield Multi-Stage DCF

Sources

Myers (1974), JF
Myers, S. C. "Interactions of Corporate Financing and Investment Decisions: Implications for Capital Budgeting." The Journal of Finance, 29(1), 1974, pp. 1-25.
Original statement of adjusted present value, separating operating value from financing side effects.
Titman & Martin, Ch. 9
Titman, S., & Martin, J. D. Valuation: The Art and Science of Corporate Investment Decisions. Pearson.
Presents APV as the remedy for the WACC assumption of a constant capital structure over time.

How to cite this page

Dr. Phil's Quant Lab. (2026). Adjusted Present Value (APV). Derivatives Atlas. https://phucnguyenvan.com/concept/sabv-apv

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