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Chapter 4: Q4DQ (page 405)

What is normally used as the discount rate in the net present value method?

Short Answer

Expert verified

Weighted average cost of capital is used as discount rate in net present value method.

Step by step solution

01

Definition of cost of capital

Cost of capital is the rate of return provided by the investment made by the investor in the particular investment opportunity.

02

Discount rate in the net present value method

Net present value method is the capital budgeting technique used by the company for the selection of the investment opportunity. Net present value is the value of the all-future cash inflows generated by the company after discounting with discount rate. Discount rate used is weighted average cost of capital which includes the cost of equity, preferred stock and debt.

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Most popular questions from this chapter

Exodus Limousine Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 50 years. Compute the current price of the bonds if the percent yield to maturity is

a. 5 percent.

b. 15 percent.

How is the present value of a single sum related to the present value of an annuity?

Carrie Tune will receive \(19,500 for the next 20 years as a payment for a new song she has written. If a 10 percent rate is applied, should she be willing to sell out her future rights now for \)160,000?

How much would you have to invest today to receive a. $15,000 in 8 years at 10 percent?

If inflationary expectations increase, what is likely to happen to the yield to maturity on bonds in the marketplace? What is also likely to happen to the price of bonds?
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