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The flow-to-equity (FTE) approach in capital budgeting is defined to be the: A
The flow-to-equity (FTE) approach in capital
budgeting is defined to be the:
A. discounting all cash fl
project at the overall
B. scale enhancing discount process.
C. discounting of the levered cashflows to the equity hold
equity.
D. the dividends and capital gains that may flow to a shar
E. discounting of the unlevered cashflows of a project fro
Expert Solution
Answer
C .
Explanation
The Flow-to-Equity method considers the cash flows available to Stockholders after paying the fixed obligations to the debt instruments. So, It considers levered cash flows after adjusting for a cash payment made for interest on debts and taxes. These remaining cash flows are then discounted with the required rate of return to know the flow available for stockholders. So, the correct option is C "discounting of a project's levered cash flows to the equity holders at the required return on equity".
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