Risk, Cost of Capital, and Capital Budgeting

Question 1

The discount rate of a project should be the

Answer 1

expected return on a financial asset of comparable risk.

Question 2

Problems with estimating Beta

Answer 2

they may vary over time
sample size may be inadequate
betas are influenced by changing financial leverage and business risk

Question 3

Determinants of Beta

Answer 3

Cyclicality of revenues, operating leverage, financial leverage