Capital Budgeting Analyses Typically Assume a Constant Cost of Capital

question 133

Multiple Choice

Capital budgeting analyses typically assume a constant cost of capital, even though the analysts know it will change. One reason for this practice is that

• A) the changes are too small to affect the decision.
• B) a constant cost of capital is the most conservative assumption.
• C) the changes are unpredictable.
• D) NPV calculations do not allow more than one discount rate.

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Definitions:

Demand Curve

A graphical representation of the relationship between the price of a good and the quantity demanded, typically downward sloping from left to right.

Elasticity Coefficient

A numeric value that measures the responsiveness of the quantity demanded or supplied of a product to changes in one of its determinants, such as price.

Oligopoly

A market structure characterized by a small number of large firms dominating the industry, often leading to limited competition.

Total Market

The complete demand for a product or service within an industry, encompassing all consumers and market segments.