The flow-to-equity approach has been used by the firm to value their capital bud

Question

The flow-to-equity approach has been used by the firm to value their capital budgeting projects. The total investment cost at time 0 is $640,000. The company uses the flow-to-equity approach because they maintain a target debt to value ratio over project lives. The company has a debt to equity ratio of 0.5. The present value of the project including debt financing is $810,994. What is the relevant initial investment cost to use in determining the value of the project?

$170,994

$267,628

$372,372

$543,366

$640,000

SHOW ALL WORK

Explanation / Answer

Debt + equity = .50 + 1 = 1.50

weight of debt = .50 /1.50 = .33

weight of equity = 1/1.50 = .67

Debt financing = 810994 *.33 = $ 267628.02

Initial investment for equity valuation = 640000 - 267628

                                                = $ 372372

correct option is "C"

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