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Advantages and Disadvantages Apv and Wacc

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    | | APV| | | Approach is to analyze financial maneuvers separately and then add their value to that of the business. | APV always works when WACC does, and sometimes when WACC doesn’t, because it requires fewer restrictive assumptions| Some limitations amount to technicalities, which are much more interesting to academics than to managers. | | Less Prone to serious errors than WACC. Income from stocks- as opposed to bonds- may be taxed differently when the investor files a personal tax return : this usually causes an analyst to overestimate the net advantage associated with corporate borrowing when computing the present value of interest tax shields| | General Managers will find that APV’s power lies in the added managerially relevant information it can provide. Most analysts neglect costs of financial distress associated with corporate leverage, and they may ignore other interesting financial side effects as well. | | Flexible – analyst can configure a valuation in whatever way makes most sense for the people involved in managing its separate parts. | APV remains a DCF methodology and is poorly suited to valuating projects that are essentially options. | | Exceptionally transparent: you get to see all the components of value in the analysis.

    None are buried. | | | Based on dollar level of debt and level of debt it known| | | ADVANTAGES| DISADVANTAGES| WACC| | | Approach is to adjust the discount rate (cost of capital) to reflect financial enhancements. | (supposed to handle financial side effect automatically, without requiring any addition after the fact)| WACC has never been that good at handling financial side effects. It addresses tax effects only and not very convincingly, except for simple capital structures. | Applicable to mature, stable firms| Discount only once- the discount rate has to be adjusted to pick up all the costs and benefits of a selected capital structure. | | Company has to have capital structure weights | A lot of analytical energy goes into computing it. | | | Can miscalculate WACC – lots of errors. – Computational challenges| | | CANNOT USE BV for DEBT – only MV| | | Less Informative than using APV|

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