The flOw-To-Equity Approach to Capital Budgeting Is a Three Step

question 11

Multiple Choice

The flow-to-equity approach to capital budgeting is a three step process of:

• A)calculating the levered cash flow, the cost of equity capital for a levered firm, then adding
• The interest expense when the cash flows are discounted.
• B)calculating the unlevered cash flow, the cost of equity capital for a levered firm, and then
• Discounting the unlevered cash flows.
• C)calculating the levered cash flow after interest expense and taxes, the cost of equity
• Capital for a levered firm, and then discounting the levered cash flows by the cost of equity
• Capital.
• D)calculating the levered cash flow after interest expense and taxes, the cost of equity
• Capital for a levered firm, and then discounting the levered cash flows at the risk free rate.
• E)None of the above.

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Definitions:

Partial Melting

The process where only a portion of a solid mixture melts, resulting in the formation of magma with different composition from the original material.

Subduction

The process by which one tectonic plate moves under another plate and into the mantle, causing volcanic and seismic activity.

Normal Faulting

A type of faulting in which the hangwall moves downward relative to the footwall, often associated with tensional forces pulling the Earth's crust apart.

Volcanic Neck

A column of solidified lava or magma that formed in the vent of a volcano and became exposed through erosion.