We can use a one-year Canadian Treasury Bill rate as ________ interest rate when we convert an unlevered beta to a cost of capital for an acquired firm.
A) a risk-free
B) a nominal
C) a real
D) an effective

Question

Quizplus · Accepted Answer

A one-year Canadian Treasury Bill rate is commonly used as a risk-free rate in finance, as it is assumed to be free from credit and default risk. When we are converting an unlevered beta to a cost of capital for an acquired firm, we need a risk-free rate to calculate the cost of equity capital using the Capital Asset Pricing Model (CAPM). Therefore, A is the best choice as it provides a risk-free rate. Nominal, real and effective interest rates are not relevant in this context.

We Can Use a One-Year Canadian Treasury Bill Rate as ________