Question

Which of the following statements about valuing a firm using the APV approach is most CORRECT A. The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity. B. The value of equity is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity. C. The APV approach stands for the accounting pre-valuation approach. D. The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows before the horizon date at the unlevered cost of equity. E. The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity.

Answer 1

Answer:

D) The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows before the horizon date at the unlevered cost of equity.

Explanation:

The adjusted present value method is very similar to the NPV method, but with some "adjustments". It determines the NPV of a project if it was financed solely with equity. Then it includes the tax benefits that could be obtained if the project was financed by debt. The benefits are basically lower taxes due to interest payments that reduce taxable income.

The APV  uses the company's WACC as the discount rate.