Benefits of APV compared to WACC
It can be easier to apply than the WACC method when the firm does not maintain a constant D/E ratio
Explicitly values market imperfections and allows managers to measure their contirbution to value
Can easily be extended to inlcuded further imperfections
Flow to equity calculation
Benefits and Disadvantages of FTE Method
May be simpler to use when calculating the value of equity for the entire firm if the firms capital structure is complex and the market values of other securities in the firms capital structure are unknown
May be viewed as more transparent for discussing a projects benefits to shareholders by emphasizing implicaitons for equity
One must compute the projects debt capacity to determine interest and net borrowing before capital budgeting decisions can be made
Benefits and Disadvantages of WACC Method
Benefits
Disadvantages
Widely used and accepted by practitioners.
Easy to apply and interpret.
Considers both the cost of debt and equity in determining the appropriate discount rate.
Reflects the company's overall cost of capital.
Assumes a constant debt-to-equity ratio, which may not be realistic in practice.
Does not value market imperfections explixitly
May not be appropriate for companies with a significant amount of non-operating assets or liabilities.
Last changed2 years ago
