Firms have no way to directly estimate the discount rate that reflects the risk of
A) a publicly traded security.
B) its debt securities.
C) the incremental cash flows from a particular project.
D) None of the above

Question

Quizplus · Accepted Answer

The discount rate that reflects the risk of the incremental cash flows from a particular project is called the project-specific cost of capital. Firms have to estimate this discount rate, also known as the hurdle rate, by considering the risk-free rate, market risk premium, and company-specific risk factors. In contrast, the discount rates for publicly traded securities and debt securities are readily available in the market.

Firms Have No Way to Directly Estimate the Discount Rate