Question

If the risk-free rate increases, which of the following are possible outcomes for a company’s interest rate (or the discount rate applied to its future cash flows)?

		a) increases
		b) decreases
		c) remains the same
		d) all the above

d) Their prices may change

Answer 1

Correct Answer is option A
If the risk free rate is increase company discount rate is increase.
Company cash flow is discounted by Either by Cost of Equity (ke) when there is no leverage or WACC (Kc)
WACC - Weighgted average cost of capital
Cost of equity is calculated by -
Ke = Rf + (Rm -Rf)*beta
If Rf in increase cost of equity is increase therefore discount rate is increased applied to future cash flow.

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