Question

The capital budgeting decision techniques discussed so far all have strengths and weaknesses; however, they do comprise the most popular rules for valuing projects. On the other hand, valuing an entire business requires that some adjustments be made to various pieces of these methodologies. As an example, in valuing a business, one frequently used alternative to Net Present Value (NPV) is called Adjusted Present Value (APV). Research other popular business valuation models.

In 600-700 content words, respond to the following:

1. Define APV. How does it differ from NPV?
2. Identify and discuss at least two other businessvaluation models that are popular.

Answer 1

Answer:-

Adjusted present value (APV) is the value of the firm when we take take only equity into consideration along with debt financing costs such as interest tax shields, costs of financial distress and debt issuance. It's the value of of the firm without debt.

Net Present Value (NPV) :- The NPV is used to calculate the current value of all cash inflows generated buy the project along with considering the initial investment which is a cash outflow.

The difference between APV and NPV is that use of discount rate. The APV uses cost of equity as the discount rate whereas the NPV uses Weighted average cost of capital (WACC) as the discount rate.The APV considers equity whereas the NPV considers both equity and debt.

The two other popular Business Valuation models are:-

1) Discounted Cash Flow (DCF) Method:- The DCF method also known as income approach is based on the projected cash flows in the future discounted to its present value. This method is quite popular and extensively used by many companies and analysts for business valuation.

2) Market value business :- This method compares the business to other similar businesses that are sold. The two methods under this category are

a) Public company comparables- This method values the business with the company with similar business that are publicly traded in the market, however it is difficult to find companies that are quite similar in all respects. The companies that have comparable and similar business are easily available but the size and scale of operations may vary largely making the comparison difficult.This method also values private companies with public companies which is complex and requires human discretion and skill to value the company.

b) Precedent transaction- This method is used to value companies using price multiples that are based on transactions of the companies in the same industry of the subject company. This method is used in the case of companies for purchase or sale for exit strategy. This approach has a drawback that the similar companies are not available and developing the reliable data for calculating the estimated value is difficult. The transactions can also be overpriced or underpriced leading to mispricing the calculated value of the business