One Flaw with Using a Higher Discount Rate to Account

question 60

Multiple Choice

One flaw with using a higher discount rate to account for flotation costs is:

• A)It increases the cost of capital
• B)It assumes a negative cash outflow for flotation costs
• C)Such an adjustment assumes level or constant growth cash flows
• D)This discount rate is the rate of return only for projects with lower risk

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Definitions:

Real Interest Rate

The interest rate adjusted for the inflation rate, reflecting the real cost of borrowing and the real yield to lenders or investors.

Nominal Interest Rate

The rate of interest before adjusting for inflation, representing the face value of interest payments.

Inflation Rate

The tempo at which the broad cost of goods and services rises, leading to a downfall in purchasing strength.

Deflation

Deflation is a decrease in the general price level of goods and services, often associated with an increase in the purchasing power of money.