Which of the following statements are correct?
i.Using the same risk-adjusted discount rate to discount all future cash flows adjusts for the fact that the more distant cash flows are often more risky than cash flows occurring sooner.II.If you can borrow all of the money you need for a project at 5%,the cost of capital for this project is 5%.III.The best way to obtain the cost of debt capital for a firm is to use the coupon rates on its bonds.IV.A firm's weighted-average cost of capital is NOT the correct discount rate to use for all projects undertaken by the firm.
A) I and III only
B) II and IV only
C) I and II only
D) I and IV only
E) I,II,and III only

Question

Quizplus · Accepted Answer

Statement I is correct as using a risk-adjusted discount rate helps in adjusting for the fact that more distant cash flows are often riskier than cash flows occurring sooner. 
Statement II is not entirely correct as the cost of capital is not just the cost of borrowing, it includes the cost of equity as well. 
Statement III is not entirely correct as the coupon rates on bonds may not be the same as the cost of debt capital. A better measure would be the current market interest rate for debt issued by the company. 
Statement IV is correct as the weighted-average cost of capital (WACC) is the discount rate used to evaluate projects that have the same risk as the company's overall operations. However, projects that have different risks than the company's overall operations may require a different discount rate.

Which of the Following Statements Are Correct