The Flow-To-Equity Approach Has Been Used by the Firm to Value

question 38

Multiple Choice

The flow-to-equity approach has been used by the firm to value their capital budgeting projects. The total investment cost at time 0 is $640,000. The company uses the flow-to-equity approach because they maintain a target debt to value ratio over project lives. The company has a debt to equity ratio of 0.5. The present value of the project including debt financing is $810,994. What is the relevant initial investment cost to use in determining the value of the project?

• A) $170,994
• B) $267,628
• C) $372,372
• D) $543,366
• E) $640,000

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Definitions:

Business Analysis

The practice of enabling change in an organizational context by defining needs and recommending solutions that deliver value to stakeholders.

New-product Strategy Development

The process of defining the market approach and product positioning for introducing new products to the market.

Product Assessment

The process of evaluating a product’s performance, quality, and market potential.

New-product Strategy Development

The overall process and planning involved in identifying market opportunities and creating new products to fulfill those opportunities.