A Firm Has Multiple Divisions of Similar Nature, Yet Varying

question 1

Multiple Choice

A firm has multiple divisions of similar nature, yet varying degrees of risk.Which one of the following would be the most appropriate, yet relatively easy, means of assigning discount rates to each of its numerous proposed investments?

• A)Assign every project a rate equal to the firm's cost of equity
• B)Assign every investment a random rate that varies between the firm's cost of debt and its cost of equity
• C)Assign every project a rate equal to the firm's WACC plus or minus a subjective adjustment
• D)Determine the best pure play rate for each project
• E)Assign every project a rate equal to the market rate of return at the time of the proposal

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Definitions:

Real Interest Rates

The interest rate adjusted for inflation, representing the true cost of borrowing and the real yield to investors.

Supply of Savings

The total amount of savings that households are willing to provide at various interest rates, often influencing investment and economic activity.

Demand for Investment

The amount of spending on investment goods, such as machinery and buildings, that businesses and governments are willing to undertake at various interest rates.

Government Budget Deficit

The financial situation that occurs when a government spends more money than it receives in revenue over a given fiscal period.