Capital Budgeting And Valuation With Leverage Chap 18

Question 1

Key steps in the WACC valuation

Answer 1

1. Determine the free cash flow of the investment
2. Compute the weighted average cost of capital
3. Compute the value of investment, including the tax benefit of leverage, by discontinuing the free cash flow of the investment using WACC

Question 2

Adjusted present value APV

Answer 2

Evaluation method to determine the leveraged value of an investment by first, calculating its unlevered value, and then adding the value of the interest tax shield and deducting any cost to get a rise from other market imperfection

Question 3

Target leverage ratio

Answer 3

When the firm adjust its debt proportionally to a project value or its cash flow. Aconstant market debt-equity ratio is a special case,.

Question 4

Flow-to- equity (FTE)

Answer 4

Evaluation method that calculates the free cash flow available to equity holders taking into account all payments to and from debt holders. The cash flows to equity holders are then discounted using the equity cost of capital.