When Evaluating a Project, the Chance of Default Is Captured

question 18

Multiple Choice

When evaluating a project, the chance of default is captured by

• A)discounting the expected cash flows of the project at the equity premium.
• B)calculating the expected cash flows of the project.
• C)using the expected return on the market as the discount rate.
• D)using the CAPM expected rate of return as the discount rate.

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Definitions:

Par Value

The face value of a bond or the stock value stated in the corporate charter, which is the minimum at which shares can be issued.

Coupon Paid Semiannually

A bond payment made twice a year, representing the interest owed to bondholders.

Annual Coupon

The yearly interest payment made to bondholders, usually fixed and expressed as a percentage of the bond's face value.

Market Risk

The possibility of investors experiencing losses due to factors that affect the overall performance of the financial markets.