An asset's beta can be used to compute its discount rate for an NPV calculation because the discount rate is equal to:

A) r_f + b(r_m + r_f) .
B) r_f - b(r_m + r_f) .
C) r_f - b(r_m - r_f) .
D) r_f + b(r_m - r_f) .
E) beta itself.

Question

Alexander Lombardo · Accepted Answer

Final Answer : D, Explanation :  The discount rate is equal to the risk-free rate plus the asset's beta multiplied by the market risk premium, which is the difference between the market return and the risk-free rate. This can be expressed as r = r_f + b(r_m - r_f). Rearranging the equation yields r = r_f + b(r_m - r_f) = r_f + br_m - br_f. This is the same equation as choice D, where r_ f  represents the risk-free rate, r_ m  represents the market return, and r_ f  - r_ m  represents the risk premium.

An asset's beta can be used to compute its discount rate for an NPV calculation because the discount rate is equal to:

A) r_f + b(r_m + r_f) .
B) r_f - b(r_m + r_f) .
C) r_f - b(r_m - r_f) .
D) r_f + b(r_m - r_f) .
E) beta itself.

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An asset's beta can be used to compute its discount rate for an NPV calculation because the discount rate is equal to:A) rf + b(rm + rf) .B) rf - b(rm + rf) .C) rf - b(rm - rf) .D) rf + b(rm - rf) .E) beta itself.

Definitions

Learning Objectives

Learning Objectives

Related questions

An asset's beta can be used to compute its discount rate for an NPV calculation because the discount rate is equal to:

A) r_f + b(r_m + r_f) .
B) r_f - b(r_m + r_f) .
C) r_f - b(r_m - r_f) .
D) r_f + b(r_m - r_f) .
E) beta itself.