hard · Principles of Finance valuation

Which approach is the MOST appropriate, and why is a constant-WACC valuation specifically problematic here?

1. Use APV: discount unlevered FCF at the unlevered cost of capital and add the tax shield discounted at the cost of debt, because the debt level — not the ratio — is fixed initially.
2. Use constant WACC: the post-deal target ratio implied at closing pins the cost of capital for all future years regardless of how leverage subsequently evolves after the acquisition closes.
3. Use the flow-to-equity method exclusively, since only equity cash flows are observable post-acquisition and a WACC-based approach cannot even be meaningfully defined here.
4. Use a constant WACC built from industry-average leverage, since the deal-specific leverage is transient and will predictably revert to the broader industry norm over time.

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