Strategic Management Strategic Fit – Value Capture

What is the first step in the APV method?

Estimate the Free Cash Flows (FCF) for the next 5 years.

What is the formula to calculate Free Cash Flow (FCF)?

FCF = EBIT × (1 – Tax Rate) + Depreciation – CapEx – ΔWorking Capital

What is the second step in the APV method?

Calculate the unlevered cost of capital (rA) using the CAPM formula.

What is the CAPM formula used to calculate rA?

rA = rf + beta × (rm – rf)

What is the third step in the APV method?

Calculate the Terminal Value (TV) of the business after year 5.

What is the formula for Terminal Value (TV)?

TV = FCF5 × (1 + g) / (rA – g)

What is the fourth step in the APV method?

Discount the Free Cash Flows and the Terminal Value using rA to find the business value.

What is the discounting formula for FCFs?

PV = FCF1 / (1 + rA)^1 + FCF2 / (1 + rA)^2 + … + TV / (1 + rA)^5

What is the result of discounting all FCFs and the terminal value?

The Present Value of the business without debt (unlevered firm value).

What is the fifth step in the APV method?

Calculate the yearly tax shields (Interest × Tax Rate).

What is the formula for a yearly tax shield?

Tax Shield = Interest × Tax Rate

What is the sixth step in the APV method?

Calculate the terminal value of tax shields if the company holds debt forever.

What is the formula for the terminal value of tax shields?

TV_ITS = Tax Rate × Debt

What is the seventh step in the APV method?

Discount all tax shields and TV_ITS using the cost of debt (rD).

What is the discounting formula for tax shields?

PV_ITS = ITS1 / (1 + rD)^1 + ITS2 / (1 + rD)^2 + … + TV_ITS / (1 + rD)^5

What is the final step in the

Add the unlevered business value and the present value of tax shields to get the total firm value.

What does APV stand for?

Adjusted Present Value

What does WACC stand for?

Weighted Average Cost of Capital

What is the main purpose of APV and WACC?

To estimate the total value of a company by discounting its future free cash flows (FCFs)

When is APV better than WACC?

When capital structure (debt/equity ratio) will change or when financing is complex, like in M&A

When is WACC better than APV?

When the debt/equity ratio is expected to remain constant over time

What is the formula for APV?

APV = Unlevered Firm Value + Present Value of Tax Shields

What are the two components of APV?

(1) Value of the firm without debt, (2) Value of tax savings from using debt

What discount rate is used to value the business in APV?

The unlevered cost of capital (rA)

What is the formula for rA using CAPM?

rA = rf + betaA \times (rm - rf)

What is the formula to calculate Free Cash Flow (FCF)?

FCF = EBIT * (1 - tax rate) + Depreciation - CapEx - ΔNWC

What is the formula for terminal value of FCFs in APV?

TV = FCF5 * (1 + g) / (rA - g)

What is the formula to calculate a tax shield (ITS) per year?

ITS = Interest * Tax Rate

What discount rate is used for tax shields?

The cost of debt (rD)

What is the formula for terminal value of tax shields (if debt is constant forever)?

TV_ITS = Tax Rate * Debt

What is the final APV result in the example?

CHF 2,639.3 million

What is the WACC formula?

WACC = rE (E / V) + rD (1 - Tax Rate) * (D / V)

What is the formula for terminal value using WACC?

TV = FCF5 * (1 + g) / (WACC - g)

What is the formula to calculate firm value using WACC?

Firm Value = ∑ [FCFt / (1 + WACC)^t] + TV / (1 + WACC)^n

How many discount rates does APV use?

Two — rA for business value and rD for tax shields

How many discount rates does WACC use?

One — WACC

Which method separates the business and financing effects?

APV

Which method includes the tax benefit of debt directly in the formula?

APV

Why is APV better for M&A valuation?

Because it’s flexible and can handle changing financing structures