The Correct Discount Rate for a Firm to Use in Capital

question 54

True/False

The correct discount rate for a firm to use in capital budgeting, assuming that new investments are as risky as the firm's existing assets, is its marginal cost of capital.

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Definitions:

External Cost

Uncompensated costs that individuals or firms impose on others outside of market transactions, often associated with pollution.

Pollution Tax

A financial charge imposed on the emission of pollutants, intended to motivate reductions in harmful environmental discharges.

Unit of Production

A single complete item or a specified amount of a commodity produced.

Positive Externality

An economic situation where a third party benefits from a transaction or activity they are not directly involved in.