In Calculating NPV Using the Flow-To-Equity Approach the Discount Rate

question 51

Multiple Choice

In calculating NPV using the flow-to-equity approach the discount rate is the:

• A)all-equity cost of capital.
• B)cost of equity for the levered firm.
• C)all-equity cost of capital minus the weighted average cost of debt.
• D)weighted average cost of capital.
• E)all-equity cost of capital plus the weighted average cost of debt.

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Definitions:

Least-Squares Regression Method

A statistical method used to estimate the relationship between variables by minimizing the differences between the observed values and the values predicted by a linear function.

Cost Behavior

The way in which costs change in relation to changes in a firm’s level of activity or volume of production.

Break-Even Point

The level of sales at which total revenues equal total costs, resulting in no profit or loss for the business.

Variable Costs

Costs that vary directly with the level of production or service activity, such as materials and labor.