The Appropriate Opportunity Cost of Capital Is the Return That

question 57

Multiple Choice

The appropriate opportunity cost of capital is the return that investors give up on alternative investments with:

• A) the same risk.
• B) the risk-free return.
• C) the expected return on the S&P 500 index.
• D) the normal, common stock risk premium.

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Definitions:

Future Cash Flows

Projections of the amount of money that is expected to be generated by an investment in the future.

Financial Assets

Assets that derive value from a contractual claim, such as bank deposits, stocks, bonds, and derivatives.

Real Asset

Physical or tangible assets such as real estate, commodities, and natural resources that have intrinsic value.

Bonds

Fixed-income investments where an investor loans money to an entity (corporate or governmental) which borrows the funds for a defined period of time at a fixed interest rate.