Apv and Wacc
| ADVANTAGES | DISADVANTAGES | 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. | |
| 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. | |