Final answer:
In the capitalized cash flow approach, you add the present value of existing tax pools to the company valuation as they have the potential to enhance the company's value by reducing future taxable income.
Step-by-step explanation:
In the context of the capitalized cash flow approach, you add the present value of existing tax pools to the valuation. This is because existing tax pools can be used to reduce future taxable income, thereby increasing the value of the company. When calculating the present value, apply the formula to determine the present discounted value (PDV) of future profits for each time period. To find the final answer, add up all the present values for the different time periods. Given a 15% interest rate, each amount that will be received in the future must undergo a separate PDV calculation. Once you have the PDV of total profits, divide it by the number of shares to reach a price per share estimate.
Answer: b) Add the present value of existing tax pools.