Free cash flow available to both debt and equity stakeholders should be discount

Question

Free cash flow available to both debt and equity stakeholders should be discounted at the following rate to get their present value:

CAPM cost of common stock using the current beta.

CAPM cost of common stock using the relevered beta.

Weighted average cost of capital using the weights and costs at the future capital structure.

Weighted average cost of capital using the weights and costs at the current capital structure.

CAPM cost of common stock using the current beta.

CAPM cost of common stock using the relevered beta.

Weighted average cost of capital using the weights and costs at the future capital structure.

Weighted average cost of capital using the weights and costs at the current capital structure.

Explanation / Answer

The present value of the future cash flows will be discouted for both debt and equity using the Weighted average cost of capital because of the involvement of common funds of both debt and equity.

Also the cashflows to be discounted are in future point of time and hence the discounting also should be of future capital structure.

Hence answer is option D.

Weighted average cost of capital using the weights and costs at the current capital structure.

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