The Discount Rate That Will Result in the Highest Net

question 74

Multiple Choice

The discount rate that will result in the highest net present value for a project is

• A) any rate lower that the cost of capital.
• B) any rate higher than the cost of capital.
• C) the lowest rate used to evaluate the project.
• D) the highest rate used to evaluate the project.

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Definitions:

Dividend Irrelevance Theory

Holds that dividend policy has no effect on either the price of a firm’s stock or its cost of capital.

Shareholders

Shareholders are individuals or entities that own one or more shares of stock in a public or private corporation, granting them certain rights such as voting on corporate matters and receiving dividends.

Buying and Selling

The basic act of trading or exchanging goods, services, or financial instruments, such as stocks or currencies.

Bird-In-The-Hand Theory

Assumes that investors value a dollar of dividends more highly than a dollar of expected capital gains because the dividend yield component, D1/P0, is less risky than the g component in the total expected return equation rs = D1/P0 + g.