Reconciling the Equity and Invested Capital Methods of Valuation when the Capital Structure is Changing
American Society of Appraisers
Business Valuation Review™
Volume 23, Issue 1
James R. Morris, Ph.D., AM
When the firm's capital structure is changing over time, the appraiser may have difficulty reconciling the values derived with the equity and invested capital methods. This article shows how we can handle this problem so that we can calculate the equity value and value of invested capital such that the values are consistent with each other and with the capital structure mix. We use a period-by-period iterative technique so that in each period the values are consistent with the capital structure prevailing at that date. In addition, we demonstrate that the adjusted present value approach leads to the same valuation conclusion as the equity and the invested capital approaches.
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