Which of the Following Statements About the Riskiness of an Investment

question 18

Multiple Choice

Which of the following statements about the riskiness of an investment is true?

• A) The lower the risk, the higher the discount rate.
• B) The higher the risk, the higher the discount rate.
• C) The higher the risk, the lower the cost of capital.
• D) The higher the risk, the higher the minimum desired rate of return.

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Definitions:

Required Rate

The minimum expected rate of return on an investment, determined by assessing risk levels and market conditions.

Credit Policy

A set of guidelines that a company follows to determine credit terms for customers, which influences decisions such as payment periods and credit limits.

Net Present Value

A method used in capital budgeting to evaluate the profitability of an investment or project, calculated as the difference between the present value of cash inflows and outflows over a period.

Monthly Interest Rate

The fraction of the annual interest rate divided by twelve, representing the interest for a single month.