The unlevered cost of equity is often viewed as the appropriate discount rate rather than the cost of debt or a risk-free rate because tax savings are subject to risk,since the firm may default on its debt or be unable to utilize the tax savings due to continuing operating losses.

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This statement is true because tax savings from debt financing are not guaranteed and are subject to risk, such as the possibility of default or continuing losses. Therefore, the unlevered cost of equity, which does not involve the use of debt, is often viewed as a more appropriate discount rate.

The Unlevered Cost of Equity Is Often Viewed as the Appropriate