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

question 36

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 cashflows 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, 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, the cost of equity capital for a levered firm, and then discounting the levered cash flows at the risk free rate.

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Definitions:

Predetermined Overhead Rate

An estimated charge per unit of activity used to allocate manufacturing overhead costs to products.

Job-Order Costing

An accounting method used to track costs specifically associated with a given job or project.

Machine-Hours

A metric for the amount of time a machine is operated, used as a basis for allocating manufacturing overhead costs.

Manufacturing Overhead

All manufacturing costs that are not directly assignable to specific products, including indirect materials, labor, and other indirect costs.