Question
6) NOTE-You must choose ALL THE CORRECT ANSWERS, NOT JUST ONE OF THEM. THERE ARE THREE CORRECT ONES! Do a web search for APV--Adjusted Present
6) NOTE-You must choose ALL THE CORRECT ANSWERS, NOT JUST ONE OF THEM. THERE ARE THREE CORRECT ONES! Do a web search for APV--Adjusted Present Value". The conventional APV approach sometimes yields a higher value for a GROWING business than the cost of capital (DCF) approach because it views tax savings from debt as less risky than operating profits, AND the cost of capital approach also adjusts the cost of capital upward for a debt burden that will likely grow as sales increase, and as debt as a percentage of total capital stays constant.
A. True, because a growing firm, if it is to maintain a constant debt-total assets ratio, will issue more bonds. And this will assume, perhaps, more risk to be incorporated into the WACC.
B. False, because a growing firm, if it is to maintain a constant debt-total assets ratio, will issue more bonds. And this will assume, perhaps, that the WACC drops, and that the unlevered beta is the same as the levered beta.
C. True, because a growing firm, if it is to maintain a constant debt-total assets ratio, will issue more bonds. And this will raise the present value of the tax savings from deducting interest.
D. APV will value a company more highly if the analyst under-estimates bankruptcy costs.
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