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In the context of recent research on the Weighted Average Cost of Capital (WACC), the Adjusted...

In the context of recent research on the Weighted Average Cost of Capital (WACC), the Adjusted Present Value (APV) and the Flow-to-Equity (FTE), which of these methods would you use for the following companies (explain your choice).

c) A start-up firm with debt.

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Answer #1

Start up firm with debt

APV is appropriate in this scenario due to the following reasons:

  • APV is the NPV if financed solely by equity including the pv of leveraging.
  • APV shows the benefit of tax shields from leveraging.
  • It is best used for leverage transactions, such as leveraged buyouts.
  • Also an APV method is used when the debt structure is expected to keep Changing rapidly , as in the case of startups.
  • Hence APV would be a suitable method for startups with debt.
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