Everything else equal, an asset's value is:

A. Inversely related to the rate of return investors require to purchase it.

B. Directly proportional to the cost of debt used in the capital budgeting process of the firm.

C. Not related to the cash flows that the asset is expected to generate during its life.

D. Directly proportional to the rate of return investors require to purchase it.

Question

Business

Khalil Turner

24 January, 19:53

Everything else equal, an asset's value is:

A. Inversely related to the rate of return investors require to purchase it.

B. Directly proportional to the cost of debt used in the capital budgeting process of the firm.

C. Not related to the cash flows that the asset is expected to generate during its life.

D. Directly proportional to the rate of return investors require to purchase it.

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Answers (1)

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Ernest Finley · Answer 1

The correct option is A, an asset's value is inversely related to the rate of return investors require to purchase it

Explanation:

The asset value is the initial purchase price determined by discounting the future cash flows from the asset to present values using a the required rate of return.

Ultimately, the higher the required return, the lower the present value of the investment whose price is being determined and the lower the discount the rate of return used in discounting relevant cash flows to present values the higher the present values.