fromthevalueoftheoperatingassetsisthatmoreattention
can be paid to the cost and probability of distress.
ReviewingthestepsintheAPVapproach,weestimatethe
valueofthefirminthreesteps.Webeginbyestimatingthe
value of the firm with no leverage, by discounting the
expectedfreecashflowtothefirmattheunleveredcostof
equity. In the special case where cash flows grow at a
constant rate in perpetuity,the value of thefirm is easily
computed.
whereFCFF 0 isthecurrentafter-taxoperatingcashflowto
the firm,ρu is the unlevered cost of equity, and g is the
expectedgrowthrate.Inthemoregeneralcase,wecanvalue
thefirmusinganysetofgrowthassumptionswebelieveare
reasonable for the firm.
Wethenconsiderthepresentvalueoftheinteresttaxsavings
generatedbyborrowingagivenamountofmoney.Thistax
benefit is a function of the tax rate of the firm and is
discountedatthecostofdebttoreflecttheriskinessofthis
cash flow. If the tax savings are viewed as a perpetuity,
Foradistressedfirm,thisvaluewillbedepressedifthefirm
hassubstantialoperatinglossesanddoesnotexpecttoreceive
tax benefits for the foreseeable future.