The Adjusted Present Value method (APV) can be regarded as an innovation to the DCF method. The APV method distinguishes between the value of the enterprise and the value of the financing of that enterprise.
Based on works by ‘Miller-Modigliani’ it is known that – although the costs of debt can be considerably lower than the costs of equity, and it thus appears to be attractive to finance an enterprise with as much borrowed money as possible – the influence of financial ‘leverage’ in an efficient capital market is limited to fiscal effects. Apart from that, costs for ‘financial distress’ in a situation in which too high financial ‘leverage’ is concerned should be taken into account.
The strength of the APV method is that it makes the value of the business clear, as well as what the value of fiscal & financial engineering is. Both components are valued separately with the APV method.