We Can Think About the Interest Rate as the "Price

question 90

Multiple Choice

We can think about the interest rate as the "price" of capital because

• A)firms use financial capital to purchase physical capital and the interest rate is the "price" of financial capital.
• B)the interest rate represents the value the firm avoids paying to lenders by purchasing the capital instead.
• C)the interest rate determines the equilibrium level of investment demand.
• D)this is the amount the firm earns by purchasing the capital.
• E)the interest rate determines the MRP of the capital,which determines its price.

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Definitions:

Capital

Financial assets or the financial value of assets, such as cash, used by a company to fuel its business operations.

CAPM

The Capital Asset Pricing Model, a model that describes the relationship between systematic risk and expected return for assets, particularly stocks.

Dividend Growth Model

A method for valuing a stock by using predicted dividends and discounting them back to present value.

Cost of Equity

The cost of equity is the return that a company is expected to pay to its shareholders for their investment in the company's equity.