Final answer:
The easiest valuation method when debt is predetermined is the CFTE method because it focuses on future earnings and discounts them at a single rate, without the need for complex calculations involving changing capital structures or separate calculations for tax shields.
Step-by-step explanation:
When debt is predetermined in a valuation, the easiest method to use is generally the Capitalization of Future Earnings (CFTE) method. This method involves estimating the future profitability of the company and capitalizing these earnings at a suitable discount rate to arrive at a present value. The reason CFTE is often considered the easiest is because the Weighted Average Cost of Capital (WACC) method involves calculating the cost of equity and debt to determine a discount rate, which can be more complex when considering perpetually changing capital structures. The Adjusted Present Value (APV) method separately calculates the value of the firm without debt and the value of the tax shield from debt, which also adds complexity if debt levels are already set.
The application of a Present Discounted Value approach to a bond or a stock takes into account the expected future cash flows, such as capital gains from the sale of the stock and potential dividends, and discounts these back to the present using a chosen interest rate. Differences of opinion in these assumptions can lead to variations in valuation outcomes. However, when debt is predetermined, the CFTE method streamlines the valuation process by focusing directly on the firm's earnings and a single discount rate.