The Most Appropriate Discount Rate to Use When Applying the Operating

question 70

Multiple Choice

The most appropriate discount rate to use when applying the Operating Free Cash Flows model is the firm's

• A) Required rate of return based on the capital asset pricing model (CAPM)
• B) Required rate of return based on the dividend discount model (DDM)
• C) Weighted average cost of capital (WACC)
• D) Historical cost of debt and equity
• E) All of the above are appropriate depending on the situation

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Definitions:

Risk-as-feelings Hypothesis

The theory that people make decisions based on their emotional responses to risks, rather than through logical assessment of the risks and benefits.

Broaden-and-build Theory

A psychological theory suggesting that positive emotions expand one’s awareness and encourage novel, varied, and exploratory thoughts and actions.

Affect-as-information Hypothesis

A theory suggesting that individuals use their emotional states as information in making judgments and decisions.

Emotionally Affected

Experiencing an impact on one's mood or feelings due to an external event, situation, or interaction.