Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?
A) The value of equity is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.
B) 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.
C) The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity.
D) The CAPV approach stands for the accounting pre-valuation approach.
E) The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.

Question

Quizplus · Accepted Answer

The CAPV approach separates the value of the firm's operations from the value of its financing decisions (i.e. equity and debt). Therefore, 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 (i.e. the cost of equity if the firm had no debt). The value of equity is then calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity (i.e. the required return for equity investors). Choice A is incorrect because it only includes the free cash flows, tax shields, and horizon value for calculating the equity value, and excludes the valuation of the operations. Choice C is incorrect because it only includes the horizon value and free cash flows for calculating the equity value, and excludes the valuation of the operations. Choice D is incorrect because the CAPV approach stands for the "compressed adjusted present value" approach, not the "accounting pre-valuation" approach. Choice E is incorrect because it incorrectly includes the free cash flows, tax shields, and horizon value in the valuation of operations rather than the equity value.

Which of the Following Statements About Valuing a Firm Using