The appropriate risk-free rate to use when calculating the cost of equity for a company is
A) a long-term Treasury rate.
B) a short-term Treasury rate.
C) a 50/50 mix of short-term and long-term Treasury rates.
D) none of the above.

Question

Quizplus · Accepted Answer

The appropriate risk-free rate to use when calculating the cost of equity for a company is a long-term Treasury rate because it provides the most accurate reflection of the time value of money and the risk-free rate available in the market. Short-term Treasury rates can be influenced by economic conditions, such as changes in the Federal Reserve's monetary policy, and may not be a reliable indicator of the risk-free rate over a longer time horizon. A mix of short-term and long-term Treasury rates is not necessary as the long-term rate alone is sufficient.

The Appropriate Risk-Free Rate to Use When Calculating the Cost