An Estimation of the Opportunity Cost of Capital for Projects

question 2

Multiple Choice

An estimation of the opportunity cost of capital for projects that have an "average" level of risk is the rate of return on:

• A)treasury bills.
• B)the market portfolio.
• C)the market portfolio minus the rate of return on treasury bills.
• D)treasury bonds plus a maturity premium.

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Definitions:

Economic Profit

The difference between a firm's total revenue and its total costs, including both explicit and implicit costs, reflecting the true profitability of the firm.

Economic Profit

The gap between the total income a company makes and all of its expenses, covering both direct and indirect costs.

Optimal Output

The level of production that maximizes a firm's profits, where marginal revenue equals marginal cost.

Economic Profit

The contrast between a corporation's entire earnings and its full expenses, including both tangible and intangible costs.