Using the cost of capital method to value an LBO involves all of the following steps except for which of the following?
A) Adjusting the discount rate to reflect changing risk.
B) Adding the present value of future tax savings to the present value of annual free cash flows to equity.
C) Calculating a terminal value.
D) Projecting annual debt-to-equity ratios.
E) Projecting annual cash flows.

Question

Quizplus · Accepted Answer

The cost of capital method to value an LBO involves adjusting the discount rate to reflect changing risk, calculating a terminal value, projecting annual debt-to-equity ratios and projecting annual cash flows. However, it does not involve adding the present value of future tax savings to the present value of annual free cash flows to equity.

Using the Cost of Capital Method to Value an LBO