The Adjusted Present Value (APV) method separates the value of a business into two parts: the base value assuming no debt, and the additional value (or cost) resulting from financing decisions.
To accurately model this, Valutico applies a nuanced calculation of interest expenses and interest rates, using multiple components to reflect the company’s actual financing structure.
Key Interest Rate Calculations in APV
Valutico uses three types of interest rates to reflect borrowing costs and the return on excess cash:
1. Interest Rate on Debt
Reflects the effective cost of borrowing.
Formula:
Interest Paid (Current Year) ÷ Total Debt (Previous Year)
2. Interest Rate on Cash
Represents the return earned on available cash reserves.
Formula:
Interest Received (Current Year) ÷ Total Cash (Previous Year)
3. Blended Interest Rate
Captures the net financing cost or benefit, taking into account both debt and cash returns.
Formula:
(Interest Received – Interest Paid) (Current Year) ÷ Net Debt (Previous Year)
Pre-Tax Cost of Debt in APV
To assess the financing cost before taxes, Valutico uses the Blended Interest Rate as a proxy for the Pre-Tax Cost of Debt:
Formula:
Net Interest Expense (Current Year) ÷ Net Debt (Previous Year)
This reflects the company's actual cost of financing, net of interest income.
Tax Shield on Interest
One of the advantages of using debt financing is the tax shield—the reduction in taxable income from deductible interest payments. Valutico calculates this benefit as:
Formula:
Net Interest Expense × Effective Tax Rate (Previous Year)
This tax shield is factored into the APV model as an incremental value driver.
