Reading 28: Capital Budgeting LOS e～ Q1 procedure, discount, decrease, increase

youzizhang

 

LOS e: Discuss the procedure for determining the discount rate to be used in valuing a capital project, and calculate a project’s required rate of return using the CAPM.

Q1. If central bank actions caused the risk-free rate to increase, what is the most likely change to cost of debt and equity capital?

A)   Both decrease.

B)   One increase and one decrease.

C)   Both increase.

youzizhang

 

 

LOS e: Discuss the procedure for determining the discount rate to be used in valuing a capital project, and calculate a project’s required rate of return using the CAPM. fficeffice" />

Q1. If central bank actions caused the risk-free rate to increase, what is the most likely change to cost of debt and equity capital?

A)   Both decrease.

B)   One increase and one decrease.

C)   Both increase.

Correct answer is C)

An increase in the risk-free rate will cause the cost of equity to increase. It would also cause the cost of debt to increase. In either case, the nominal cost of capital is the risk-free rate plus the appropriate premium for risk.