estimatethatthecostofbankruptcyis 30 percentofunlevered
firm value.
Thevalue of theoperating assets of thefirmcan nowbe
estimated.
Incontrast,wevaluedtheoperatingassetsat2,974million
euros with the cost of capital approach. The difference
between the two approaches can be attributed to the tax
benefitsbuiltintoeachone.TheAPVmodelconsidersthetax
benefits only onexisting debt,whereas the cost of capital
approach adds in the tax benefits from future debt issues.
Cost of Capital versus APV Valuation
InanAPVvaluation,thevalueofaleveredfirmisobtained
by adding the net effect of debt to the unlevered firm value.
Inthecostofcapitalapproach,theeffectsofleverageshow
upinthecostofcapital,withthetaxbenefitincorporatedin
theafter-taxcostofdebtandthebankruptcycostsinboththe
levered beta and the pretax cost of debt.
Will the two approaches yield the same value? Not
necessarily. Thefirst reason for thedifferences is that the