The adjusted present value (APV)method of valuation is superior to the standard WACC method of valuation because the WACC method makes no adjustment for interest tax shields.

Question

Quizplus · Accepted Answer

The statement is incorrect. The WACC method does take into account the interest tax shields by incorporating the tax rate in calculating the cost of debt. The APV method, on the other hand, calculates the value of the unlevered firm and then adds the value of tax shields separately. Therefore, the APV method is more suitable when there are significant tax shield benefits from debt financing.

The Adjusted Present Value (APV)method of Valuation Is Superior to the Standard