Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?
A) The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt.
B) The horizon value is calculated by discounting the expected earnings at the WACC.
C) The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC.
D) The horizon value must always be more than 20 years in the future.
E) The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity.

Question

Quizplus · Accepted Answer

In the CAPV approach, the firm value is determined by calculating the present value of the forecasted cash flows and adjusting for the value of interest tax shields. The horizon value is the value of the firm at the end of the forecast period and is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the weighted average cost of capital (WACC), which reflects the overall cost of financing the firm. Therefore, choice C is the correct statement. The horizon value does not necessarily need to be more than 20 years in the future. The levered cost of equity may be used to calculate the WACC, but it is not relevant to how the horizon value is calculated in this approach.

Which of the Following Statements About Valuing a Firm Using