M&A: Adjusted Present Value (APV) Valuation

The adjusted present value approach values M&A targets by splitting the valuation into the target's discounted future cash flows and the value of the tax shield from debt financing of the deal. The model requires the analyst to estimate the ratio debt/equity for several years in the future. Here we look at the steps involved in applying the APV method and take a closer look at the role of the tax shield in the valuation.