After reading the article, "Using APV: A Better Tool for Valuing Operations Download Using APV: A Better Tool for Valuing Operations," describe the key benefit(s) of using the APV approach in this acquisition deal. If you are required to use the WACC approach to value the same acquisition target (Acme Filters), provide the key steps of how you plan to collect more information, make additional assumption(s), and/or set up discount rates for cash flows to get the valuation work done. Be specific in describing the additional information, assumptions, or various discount rates that you plan to implement to ensure successful execution of your WACC valuation.

This discussion aligns with the following module objective(s):

• Explain the effects of leverage on firm valuation.
• Apply Adjusted Present Value (APV), the Flows to Equity (FTE) approach, and the WACC method for valuing projects with leverage.
• Compare the APV, FTE, and WACC approaches.

Step 1: Prepare Performance Forecasts (in millions of dollars) Pro Forma Income Statements EBIT Interest EBT Taxes @ 34% Net income Supplemental data Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 $22.7 29.8 37.1 40.1 42.1 21.6 19.1 17.8 16.7 15.8 1.1 10.7 19.3 23.3 26.3 0.4 3.6 6.6 7.9 8.9 0.7 7.1 12.7 15.4 17.3 Depreciation $21.5 13.5 11.5 12.1 12.7 Capital expenditures 10.7 10.1 10.4 11.5 13.1 A Net working capital -12.3 1.9 4.2 5.2 6.1 A Other assets 9.0 6.9 3.4 0.0 0.0 Pro Forma Balance Sheets Assets Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Net working capital $60.0 47.7 49.6 53.7 59.0 65.1 Net fixed assets 221.0 210.3 206.9 205.7 205.1 205.5 Other assets Total assets 26.0 307.0 275.0 17.0 10.1 6.7 6.7 6.7 266.5 266.2 270.8 277.3 Liabilities and equity Revolver @ 7.5% $13.0 0.2 4.8 11.7 20.9 20.0 Bank loan @ 8.0% 80.0 60.0 40.0 20.0 0.0 0.0 Subordinated debt @ 9.5% 150.0 150.0 150.0 150.0 150.0 0.0 Long-term debentures at 9.0% 0.0 0.0 0.0 0.0 0.0 140.0 Total debt 243.0 210.2 194.8 181.7 170.9 160.0 Equity 64.0 Total liabilities and equity 307.0 64.7 275.0 266.5 71.8 84.5 99.9 117.2 266.2 270.8 277.3 Supplemental data Interest paid Principal repaid Dividends $0.0 21.6 19.1 17.8 16.7 15.8 0.0 32.8 15.5 13.1 10.8 10.9 0.0 0.0 0.0 0.0 0.0 0.0 Base-Case Cash Flows Year O Year 1 Year 2 Year 3 Year 4 Year 5 EBIT $22.7 29.8 37.1 40.1 42.1 - Taxes @ 34% 7.7 10.1 12.6 13.6 14.3 - EBIT (1-1) 15.0 19.6 24.5 26.4 27.8 + Depreciation 21.5 13.5 11.5 12.1 12.7 Operating cash flow 36.5 33.1 36.0 38.5 40.4 A Net working capital 12.3 -1.9 -4.2 -5.2 -6.1 - Capital expenditures -10.7 -10.1 -10.4 -11.5 -13.1 - A Other assets 9.0 6.9 3.4 0.0 0.0 - Free cash flow of assets 47.0 28.1 24.8 21.8 21.3