The correct discount rate for a firm to use in capital budgeting,assuming that new investments are of the same degree of risk as the firm's existing assets,is its marginal cost of capital.

Question

Quizplus · Accepted Answer

The marginal cost of capital reflects the cost that a firm incurs to raise additional funds for investment. Therefore, using the marginal cost of capital as the discount rate ensures that the new investments are evaluated based on the same degree of risk as the firm's existing assets.

The Correct Discount Rate for a Firm to Use in Capital