Which of the following statements about valuing a firm using the APV approach is most CORRECT?
A) The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt.
B) The horizon value is calculated by discounting the expected earnings at the WACC.
C) The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC.
D) The horizon value must always be more than 20 years in the future.
E) The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity.

Question

Quizplus · Accepted Answer

The correct statement is that the horizon value in the APV (adjusted present value) approach is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the weighted average cost of capital (WACC), which includes both the cost of debt and the cost of equity. Option A is incorrect because it only includes the cost of debt, and option B is incorrect because it does not consider the tax savings. Option D is incorrect because there is no specific rule about the time horizon, it can vary depending on the situation. Option E is incorrect because it uses the levered cost of equity, which is not the correct discount rate to use in the calculation of the horizon value.

Which of the Following Statements About Valuing a Firm Using