The WACC Approach to Valuation Is Not as Useful as the APV

question 32

Multiple Choice

The WACC approach to valuation is not as useful as the APV approach in leveraged buyouts because:

• A)there is greater risk with a LBO.
• B)the capital structure is changing.
• C)there is no tax shield with the WACC.
• D)the value of the levered and unlevered firms are equal.
• E)the unlevered and levered cash flows are separated which cannot be used with the WACC
• Approach.

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Definitions:

Future Profit

The expected earnings or economic benefits that a company or investment will generate in future periods.

ROI

Return on Investment measures the gain or loss generated on an investment relative to the amount of money invested.

Segmentation Approach

A marketing strategy that divides a broad target market into subsets of consumers who have common needs, interests, and priorities.

Similarities

The aspects or characteristics that two or more entities have in common, allowing for comparisons or associations.