Read more on the APV approach

Spreadsheet APV

In the APV approach, the value of the firm is estimated keeping dollar debt fixed over time. The tax benefits are computed on this dollar debt and the expected bankruptcy cost is also based upon this dollar debt. In the cost of capital approach, the debt ratio of a firm is kept fixed over time. For firms that are growing over time, the cost of capital approach will tend to yield the higher estimate of value because it incorporates, into the current estimate of value, your estimates of tax benefits from future debt issues.

In practice, analysts who use APV add the expected tax benefits from debt to the unlevered firm value and all too often ignore expected bankruptcy costs (which are difficult to estimate). This valuation is incomplete since it counts in the benefits of debt but does not consider the costs.