How do you communicate the assumptions and results of APV to stakeholders or clients?

1 Why use APV?

APV is a useful alternative to other valuation methods, such as discounted cash flow (DCF) or weighted average cost of capital (WACC), when the firm has a complex capital structure or a changing debt level. APV allows you to separate the effects of financing and operating decisions on the firm's value and to capture the benefits of tax deductions from interest payments. APV also avoids the circularity problem that arises when the cost of debt depends on the firm's value, which in turn depends on the cost of debt.

2 How to calculate APV?

To calculate APV, you need to estimate three components: the present value of unlevered cash flows, the present value of tax shields, and the present value of debt. The present value of unlevered cash flows is the value of the firm's operations without considering any debt financing. You can use the free cash flow to the firm (FCFF) formula and discount it by the unlevered cost of equity, which is the return required by shareholders if the firm had no debt. The present value of tax shields is the value of the tax savings from interest payments on debt. You can use the interest tax shield formula and discount it by the cost of debt, which is the interest rate on the firm's debt. The present value of debt is the amount of debt that the firm owes to its creditors. You can use the face value of debt or the market value of debt, depending on the availability and reliability of the data.

3 How to interpret APV?

APV tells you how much the firm is worth to its shareholders and creditors. It also shows you how much value is created or destroyed by the firm's financing decisions. You can compare the APV with the market value of the firm or with the APV of other firms in the same industry or with similar characteristics. You can also analyze how sensitive the APV is to changes in the key assumptions, such as the growth rate, the discount rate, the tax rate, or the debt level. You can use sensitivity analysis, scenario analysis, or Monte Carlo simulation to perform such tests.

4 How to present APV?

When presenting APV to stakeholders or clients, you need to be clear, concise, and credible. You need to explain the logic and steps of APV in a simple and intuitive way, using diagrams, tables, or charts to illustrate the calculations and results. You need to highlight the main findings and implications of APV, such as the sources and drivers of value, the impact of financing choices, or the risks and opportunities for the firm. You need to support your arguments with evidence and data, such as industry benchmarks, market trends, or historical performance. You need to acknowledge the limitations and uncertainties of APV, such as the assumptions, estimates, or projections involved, and how they affect the accuracy and reliability of the valuation.

5 How to answer questions about APV?

When answering questions about APV from stakeholders or clients, you need to be confident, respectful, and responsive. You need to demonstrate your knowledge and expertise on APV and company valuation, using relevant examples, facts, or figures to back up your answers. You need to listen carefully and understand the concerns or interests of the questioners, and address them in a polite and constructive way. You need to provide clear and concise answers, avoiding jargon, technicalities, or ambiguity. You need to admit when you do not know something or when you need more information or time to answer, and follow up accordingly.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?