Finance
Adjusted Present Value (APV): Unlevered Value, Tax Shield & Distress
Value leveraged buyouts (LBOs) and project-finance structures using Stewart Myers's Adjusted Present Value APV = V_Unlevered + PV(Interest_Tax_Shields) - PV(Financial_Distress).
Value LBOs and paying-down debt schedules without circular WACC!
A single constant Weighted Average Cost of Capital (WACC) assumes a fixed target debt-to-value ratio forever—an assumption that breaks down immediately in Leveraged Buyouts (LBOs), infrastructure project finance, and restructurings where debt pays down rapidly over 5–7 years! Stewart Myers's Adjusted Present Value (APV) unbundles enterprise value cleanly by Value Additivity: APV = V_Unlevered + PV(Interest_Tax_Shields) - PV(Financial_Distress)!
First value the business as if 100% equity-financed at unlevered cost of capital r_u (V_Unlevered). Next add the Present Value of annual interest tax shields (Debt * r_d * Tax_Rate) discounted over the n-year debt horizon via -PV(r_d, n, Debt * r_d * Tax_Rate) (or Debt * Tax_Rate for permanent fixed debt), and subtract probability-weighted bankruptcy/distress costs!
| APV Valuation Component ($M) | Formula / Assumption | 5-Year Finite Debt Shield | Permanent Debt Shield (T*D) |
|---|---|---|---|
| Base Unlevered Value V_U | FCF discounted at r_u | $250.00M | $250.00M |
| + PV(Interest Tax Shields) | D=$100M, rd=6%, Tax=25% | +$6.32M (-PV(6%, 5, $1.5M)) | +$25.00M (25% * $100M) |
| - PV(Financial Distress) | 10% Prob * $30M Cost | -$3.00M -> APV = $253.32M | -$3.00M -> APV = $272.00M |
Finite-Horizon APV with PV of Interest Tax Shields & Expected Distress ($M)
Computes V_U + (-PV(r_d, n, D * r_d * Tax)) - (Prob_Distress * Cost_Distress) using built-in PV.
=IF(OR(B2 <= 0, B4 <= 0, B5 < 0, B5 >= 1, B6 <= 0), "Invalid Valuation Input", ROUND(B2 + (-PV(B4, B6, B3 * B4 * B5)) - (B7 * B8), 2))Permanent Debt APV Benchmark (V_U + Tax * Debt - Expected Distress)
Evaluates Modigliani-Miller perpetual tax-shield limit Tax * Debt minus expected distress cost.
=ROUND(B2 + (B5 * B3) - (B7 * B8), 2)Try the example
Use the original values or change them to test your understanding.