Apv and Wacc

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| 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. | |...
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