The method that allows you to compute the value of a firm today under both current and alternative capital structures that decomposes the value of the firm into its value as if all
Equity-financed plus the value of the tax subsidies is

Question

Quizplus · Accepted Answer

The method described in the question is called the adjusted present value (APV) method, which decomposes the value of the firm into its value as if it were entirely equity financed plus the present value of the tax subsidies that come with debt financing. M&M theory deals with the effects of capital structure on the cost of capital, while the weighted average cost of capital (WACC) is a way to calculate the overall cost of capital for a firm. The flow-to-equity method calculates the cash flows available to equity holders after debt payments are made. The method described in the question is the Adjusted Present Value (APV) approach, which calculates the value of a firm by adding the value of the firm with an all-equity capital structure and the present value of the tax subsidies associated with a leverage capital structure. The APV approach recognizes that the value of a firm is affected by both its financing decisions and the associated tax benefits, which cannot be captured through traditional discounted cash flow or weighted average cost of capital approaches. Therefore, the best choice is D.

The Method That Allows You to Compute the Value of a Firm