ZuoTi.Pro
Question

Which approach to valuing a levered firm is the most common? FTV APV WACC Part 2:...

Which approach to valuing a levered firm is the most common?

FTV

APV

WACC

Part 2:

If the firm’s debt-to-value ratio applies to the project over the life of the project, a firm should NOT be valued using:

APV

WACC

FTE

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

1) In the real world the most appropriate approach to value a levered firm is to use the WACC (weighted average cost of capital) method. The reason for that is for a levered firm WACC considers both the tax impact as well as the proportions in which the firm is levered i;e the debt equity ratio. Also while calculating the cost of equity might significantly differ than a non-levered firm so WACC is more realistic approach in the real world for valuing a levered firm.

2) If the firm's debt to value ratio applies to the project over the life of the project, a firm should not be valued using APV (adjusted present value). It should be valued using either the WACC (weighted average cost of capital) or FTE (Flow to equity) approach. The reason being they both methods considers the impact of the cost of financing and tax impact for the debt portion.

0 0
Add a comment
Know the answer?
Add Answer to:
Which approach to valuing a levered firm is the most common? FTV APV WACC Part 2:...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Of these five U.S.industries, which one tends to have the highest level of debt as a...

    Of these five U.S.industries, which one tends to have the highest level of debt as a percentage of the market value of debt plus equity? Healthcare products Construction supplies Online retail Hotel/gaming Semiconductor Which method(s) is(are) most applicable if a project's debt level is known over the life of the project? WACC Either FTE or WACC Either APV or FTE FTE APV

  • Your firm’s market value balance sheet is given as follows: Market Value Balance Sheet Excess cash...

    Your firm’s market value balance sheet is given as follows: Market Value Balance Sheet Excess cash $30M Debt $230M Operating Assets $500M Equity $300M Asset Value $530M Debt + Equity $530M Assume that the you plan to keep the firm’s debt-to-equity ratio fixed. The firm’s corporate tax rate is 50%. The firm’s cost of debt is 10% and cost of equity is 20%. Now, suppose that you are considering a new project that will last for one year. According to...

  • Which of the following is NOT a criticism of valuing a firm using the multiples approach?...

    Which of the following is NOT a criticism of valuing a firm using the multiples approach? A. The multiples approach give us the relative value, not the intrinsic value B. The multiples approach does not directly incorporate discounted cash flows C. The selection of the peer or industry group dramatically alters the outcome of the multiples approach OD. The multiples approach is most appropriate for young firms with difficult to forecast cash flows

  • APV Valuation of LBO In this levered buyout, the debt level of the company changes over...

    APV Valuation of LBO In this levered buyout, the debt level of the company changes over time. The debt level will be changing for first five years and then a terminal debt-to-equity ratio will be maintained in future therefore the APV method is appropriate for evaluating the LBO. The steps we must undertake are: Step 1: Calculating the present value of unlevered cash flows for the first five years. Step 2: Calculating the present value of the unlevered cash flows...

  • Using the Adjusted present value (APV) approach: BTR Warehousing, which is considering the acquisition of Globo-Chem...

    Using the Adjusted present value (APV) approach: BTR Warehousing, which is considering the acquisition of Globo-Chem Co., estimates that acquiring Globo-Chem will result in an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $11.0 $13.2 $16.5 Interest expense 3.0 3.3 3.6 Debt 34.1 40.3 43.4 Total net operating capital 105.1...

  • 3. Consider Table 2 Table 2 Year 3 Year 4 Cash flow Year 2 Year 0 Year 1 Cash flovw Cash flow Cash flow 70 Cash flow Pr...

    3. Consider Table 2 Table 2 Year 3 Year 4 Cash flow Year 2 Year 0 Year 1 Cash flovw Cash flow Cash flow 70 Cash flow Project 80 70 30 -150 0.24 Interest Tax Shield 0.75 (a)Consider Table 2. Calculate the net present value of the project assuming it is all-equity financed. The required return on unlevered equity is 15%. (b)Consider Table 2. Assume for now that the project is financed using equal parts debt and equity. The cost...

  • 12. APV MVP, Inc., has produced rodeo supplies for over 20 years. The company currently has...

    12. APV MVP, Inc., has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 50 percent and is in the 40 percent tax bracket. The required return on the firm's levered equity is 16 percent. The company is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows: Year Cash Flow O $15,100,000 5,400,000 8,900,000 8,600,000 The company has arranged a debt issue of...

  • 2. on pH valutar v e project! APV Gemini, Inc., an all-equity firm, is considering an...

    2. on pH valutar v e project! APV Gemini, Inc., an all-equity firm, is considering an investment of $1.4 million that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $502,000 per year for four years. The investment will not change the risk level of the firm. The company can obtain a four-year, 9.5 percent loan to finance the project from a local bank. All...

  • 1. 2. 3. 4. 5. 6. 7. 5. Merger analys is Adjusted present value (APV) approach...

    1. 2. 3. 4. 5. 6. 7. 5. Merger analys is Adjusted present value (APV) approach Aa Aa BTR Warehousing, which is considering the acquisition of Dual Purposes Products Co. (DPP), estimates that acquiring DPP will result in an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $13.0 $15.6 $19.5...

  • NO COMPUTER SOFTWARE IS ALLOWED TO ANSWER THIS QUESTION Consider Table 2 3. Table 2 CF3 CF4 CF2 CF1 CFO Project 75 40 6...

    NO COMPUTER SOFTWARE IS ALLOWED TO ANSWER THIS QUESTION Consider Table 2 3. Table 2 CF3 CF4 CF2 CF1 CFO Project 75 40 60 110 110 (200) (200) (200) 75 40 60 75 40 60 110 0.80 0.24 2.00 3.60 Interest Tax Shield Additional information for all projects 15% Cost (required return) on unlevered equity (%) Cost of debt capital (%) Corporation tax rate (%) Financing of each project: Debt 10% 20% 100 100 Equit alculate the value of project...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT