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:

Net Income

The total earnings of a company after subtracting all expenses, taxes, and costs from total revenue, representing the profit.

Dividends Paid

Cash or other forms of assets distributed by a corporation to its shareholders out of its earnings.

Average Collection Period

The average number of days it takes a company to receive payment after a sale has been made.