Using the cost of capital method to value an LBO involves which of the following steps?
A) Projection of annual cash flows
B) Projection of annual debt-to-equity ratios
C) Calculation of a terminal value
D) Adjusting the discount rate to reflect changing risk.
E) All of the above

Question

Quizplus · Accepted Answer

All of the given steps are involved in using the cost of capital method to value an LBO. Projection of annual cash flows is necessary to estimate the expected returns, projection of annual debt-to-equity ratios is helpful in understanding the financing structure of the LBO, calculation of a terminal value is necessary to estimate the enterprise value at the end of the projection period, and adjusting the discount rate to reflect changing risk is necessary to account for changes in the market and industry conditions. Therefore, all the given steps are important in this method.

Using the Cost of Capital Method to Value an LBO