If a firm is considering purchasing an asset whose beta is greater than the current beta of the firm,it should use a discount rate greater than the firm's average required rate of return to evaluate the possible investment.

Question

Quizplus · Accepted Answer

When a firm is considering purchasing an asset whose beta is greater than the current beta of the firm, it is expected to use a discount rate greater than the firm's average required rate of return. This is because the asset's higher beta implies higher risk, and the discount rate should reflect that increased risk. Therefore, the firm should adjust its required rate of return based on the asset's beta to determine the appropriate discount rate for evaluating the investment.

If a Firm Is Considering Purchasing an Asset Whose Beta