Asked by caswel mduduzi on May 26, 2024
Verified
A firm is considering a project that is virtually risk-free. The company has a beta of 1.3 and a debt-equity ratio of.4. The appropriate discount rate to use in analyzing this project is:
A) The firm's latest WACC.
B) An adjusted WACC based on a beta of 1.0.
C) The cost of equity capital.
D) The Treasury bill rate.
E) Zero.
Discount Rate
The interest rate used to discount future cash flows of a financial instrument to present value.
Debt-equity Ratio
The metric illustrating the proportionate investment of equity and debt in asset financing for a company.
Treasury Bill
Government debts issued with a maturity of up to one year, offered at a price lower than their face value.
- Acquire knowledge of the prerequisites for utilizing a corporation's weighted average cost of capital (WACC) as the discount factor for initiatives.
- Absorb the principles of the subjective manner to alter the cost of capital based on the risk associated with a project.
Verified Answer
DS
Didar SahinMay 29, 2024
Final Answer :
D
Explanation :
For a project that is virtually risk-free, the appropriate discount rate to use is the risk-free rate, which is typically represented by the Treasury bill rate. This is because the project's risk does not add any premium to the required return above the risk-free rate.
Learning Objectives
- Acquire knowledge of the prerequisites for utilizing a corporation's weighted average cost of capital (WACC) as the discount factor for initiatives.
- Absorb the principles of the subjective manner to alter the cost of capital based on the risk associated with a project.