Final answer:
When using the capitalized cash flow approach for valuation, interest-bearing debt should be deducted from the firm's value to determine its equity value accessible to shareholders.
Step-by-step explanation:
In the capitalized cash flow approach, when valuing a firm's operations for investment or acquisition purposes, interest-bearing debt has a significant impact on the value of the firm. It is important to account for this type of debt accurately. The correct action to take regarding interest-bearing debt in this valuation method is to deduct interest-bearing debt from the firm’s value. This is because the value calculated generally represents the total value of the firm, including both debt and equity, and interest-bearing debt must be subtracted to determine the equity value accessible to shareholders.
Choosing whether to borrow capital through loans or bonds, or to raise it by issuing stock, affects a firm's cash flow and control. Loans and bonds require regular interest payments, impacting the firm's financial flexibility, while issuing stock dilutes ownership but may not require immediate cash outflows.