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behavioral APV

We discussed Adjusted Present Value (APV) and then discussed and applied what Shefrin labeled as Behavioral APV. So this question is about that topic and as follows. Simply explain the intuition, the concept, and the logic behind both APV and behavioral APV. Moreover, explain how APV and behavioral APV help managers and investors in their needed analyses and decision making processes.

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We discussed Adjusted Present Value (APV) and then discussed and applied what Shefrin labeled as Behavioral APV. So this question is about that topic and as follows. Simply explain the intuition, the concept, and the logic behind both APV and behavioral APV. Moreover, explain how APV and behavioral APV help managers and investors in their needed analyses and decision making processes.

The intuition, the concepts and the logic behind adjusted present value is it is a method in which the net present value of a project if financed only by ownership equity plus the benefits that accrue from financing the project. In other words it is the tax shield that the debt provides. Intuitively, the adjusted present value method must balance the additional risks and responsibilities of debt with the tax shield that the debt provides.
The behavioral APV approach to capital structure has errors and biases by managers, or the market. Those managers that overvalue the equity of their firms and are overconfident tend to reject positive NPV projects. These managers overvalue cash flows from negative NPV projects and take up such projects.

The ...

Solution Summary

behavioral APV is discussed very comprehensively in this explanation..

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