The Most Appropriate Discount Rate to Use When Applying a FCFF

question 5

Multiple Choice

The most appropriate discount rate to use when applying a FCFF valuation model is the

• A)required rate of return on equity.
• B)WACC.
• C)risk-free rate.
• D)required rate of return on equity or risk-free rate, depending on the debt level of the firm.

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Definitions:

Fixed Costs

Costs that do not change with the level of output or activity, over a certain period or range of production.

Variable Costs

Costs that vary directly with the level of production or service activity.

Exiting

The process of leaving or withdrawing from a situation, market, or competition, often used in the context of firms leaving an industry.

Break Even

Break even is a point at which total costs and total revenues are exactly equal, meaning there is no net loss or gain, and the business or project is just covering its expenses.