The Average Cost of Capital Is the Appropriate Rate to Use

question 103

True/False

The average cost of capital is the appropriate rate to use when evaluating new investments, even though the new investments might be in a higher risk class.

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Definitions:

Floating-rate Bonds

Bonds with a variable interest rate that adjusts periodically in accordance with a benchmark interest rate or index.

Convertible Bonds

Bonds that can be converted into a predetermined number of shares of the issuing company's stock at certain times during the bond's life, usually at the discretion of the bondholder.

Interest Rate Risk

The potential for investment losses due to fluctuations in interest rates, which can affect the value of interest-bearing assets like bonds.

Price Appreciation

The increase in the value of an asset or investment over time, not accounting for dividends or interest earned.