An Estimation of the Opportunity Cost of Capital for Projects

question 32

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:

Leveraged Lease

A financing arrangement where the lessor uses borrowed funds to acquire an asset which is then leased to a lessee, allowing for tax benefits and risk distribution.

Sales-type Lease

A lease agreement where the lessor effectively sells the asset to the lessee, recognizing profit or loss at the lease's inception.

Lessor Classification

Refers to criteria used by lessors to determine whether a lease should be classified as a finance lease or an operating lease.

Nonrecourse Financing

A loan where the lender's only recourse in case of default is to seize the collateral securing the loan, with no further claim on the borrower's assets.