Without adjusting for the cost of financial distress,the adjusted present value method implies that the value of the firm could be increased by continuously taking on more debt.

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The adjusted present value (APV) method is a capital budgeting technique that calculates the net present value of a project while incorporating the value of debt financing. Without adjusting for the cost of financial distress, the APV method implies that the value of the firm could be increased by continuously taking on more debt, as the tax benefits of debt are fully realized without considering the potential bankruptcy costs. However, in reality, taking on too much debt can lead to financial distress, which can increase the probability of bankruptcy and its associated costs, such as legal fees and lost business opportunities. Therefore, it is important to adjust for the cost of financial distress when using the APV method to avoid overestimating the value of the firm.

Without Adjusting for the Cost of Financial Distress,the Adjusted Present