Which of the Following Statements Regarding the Adjusted Present Value

question 49

Multiple Choice

Which of the following statements regarding the adjusted present value method is FALSE?

• A)The firm's unlevered cost of capital is equal to its pre-tax weighted average cost of capital-that is,using the pre-tax cost of debt,rd,rather than its after-tax cost,rd (1 - τc ).
• B)A firm's levered cost of capital is a weighted average of its equity and debt costs of capital.
• C)When the firm maintains a target leverage ratio,its future interest tax shields have similar risk to the project's cash flows,so they should be discounted at the project's unlevered cost of capital.
• D)The first step in the APV method is to calculate the value of free cash flows using the project's cost of capital if it were financed without leverage.

---

Definitions:

Owners' Claims

The financial interest or claims that business owners have in the assets of their company, often calculated as equity.

Assets

Economic resources owned or controlled by a business or individual, expected to produce value or benefit in the future.

Investing Activities

Financial actions related to acquiring or disposing of long-term assets and other investments.

Long-term Borrowing

Debt obligations or loans that are due to be repaid over a period longer than one year, often used for large capital investments.