Adjusted Present Value (APV) - Lecture Notes

A collection of flashcards summarizing key concepts from the Adjusted Present Value lecture notes.

Adjusted Present Value (APV)

A method of valuing a project that separates the value from operations and financing structure.

Discounted Cash Flow (DCF) Analysis

A valuation method that forecasts cash flows for a number of years and discounts them to present value.

WACC

Weighted Average Cost of Capital; the average rate of return a company is expected to pay its security holders.

Unlevered Cost of Equity

The required return on equity of a company with no debt.

Net Present Value (NPV)

The difference between the present value of cash inflows and outflows over a period.

Residual Value

The value of an asset at the end of its useful life or at the end of the forecast period.

Financing Side Effects

Effects of financing decisions on the value of a project, such as tax shields.

Free Cash Flow (FCF)

Cash generated by the company that is available for distribution to investors.

Perpetuity

A financial instrument that pays a constant cash flow indefinitely.

Corporate Tax Rate (tc)

The tax rate imposed on the profits of a corporation.

Cost of Capital (ra)

The return rate required by those providing capital for an investment.

Debt Tax Shields

The tax deductibility of interest payments that reduces the overall tax burden.

Unlevered Cash Flow (UCF)

Cash flow available to all capital holders of a firm, assuming no debt.

Comparison of DCF Approaches

Both WACC and APV use unlevered firm cash flows, but differ in discount rates and treatment of tax shields.

Choosing DCF Approach

Depending on the debt-to-value ratio over time, one approach may be preferred over the other.