The Appropriate Risk-Free Rate to Use When Calculating the Cost

question 23

Multiple Choice

The appropriate risk-free rate to use when calculating the cost of equity for a firm is

• A) a long-term Treasury rate.
• B) a short-term Treasury rate.
• C) a 50/50 mix of short-term and long-term Treasury rates.
• D) none of the above.

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Definitions:

Useful Life

The period during which an asset is expected to be usable for the purpose it was acquired.

Double-declining-balance Method

A form of accelerated depreciation where an asset’s book value is decreased at double the rate of its straight-line depreciation.

Straight-line Method

A depreciation method that allocates an equal amount of depreciation expense for an asset over its useful life.

Salvage Value

The estimated residual value of an asset at the end of its useful life, usually considered for depreciation calculations.