When determining the discount rate to apply to a firm's expected future cash flows,analysts should select a rate that reflects the risk (or uncertainty)associated with these cash flows.

Question

Quizplus · Accepted Answer

This statement is true. The discount rate should reflect the degree of risk associated with the expected future cash flows because the higher the risk, the higher the required rate of return investors will demand to invest in the firm. Different methods can be used to calculate the appropriate discount rate depending on the specific risks associated with the cash flows, such as the capital asset pricing model (CAPM) or the weighted average cost of capital (WACC).

When Determining the Discount Rate to Apply to a Firm's