Question

what is risk adjusted discount rate? how is it used?

what is risk adjusted discount rate? how is it used?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Broadly,

Discount rate = Minimum expected rate + Risk premium

Risk adjusted discount rate is rate which is provided with risk premium or loaded with risk premium. The risk premium is a rate which take cares for risk which is taken for a given project.

Each project carries different proportionate of risk and such projects are discounted with higher discount rate to compensate investors.

Investor taking up risky project will demand for higher risk premiums hence discount rate for such project will be higher.

Investor taking up less risk project will earn lower discount rate in comparison to one who takes up risk project.

Discount rates are used to discount the future cash flow of the project. Higher the discount rate will impact the present values of the project. This higher rate of discounting is nothing but the risk adjustment.

-----

If let me know in comment if more explanation needed.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Assume that the risk-free rate is 5%, the risk-adjusted discount rate is 10%, the expected cash...
Assume that the risk-free rate is 5%, the risk-adjusted discount rate is 10%, the expected cash flow for t = 1 is 495, and the expected cash flow for t = 2 is 508.2 a)Assume that the cash flow risk increases geometrically through time. Compute the present value of the cash flow stream using the certainty equivalent method. b) Assume that the cash flow risk remains constant through time. Compute the present value of the cash flow stream using the...
(TCOs F, G) Discuss the problems associated with the use of a risk-adjusted discount rate in...
(TCOs F, G) Discuss the problems associated with the use of a risk-adjusted discount rate in cash flow analysis
Explain the impact of risk on discount rate used to find NPV and as a benchmark...
Explain the impact of risk on discount rate used to find NPV and as a benchmark for IRR.
​(​Risk-adjusted discount rates and risk classes​) The G. Wolfe Corporation is examining two​ capital-budgeting projects with​...
​(​Risk-adjusted discount rates and risk classes​) The G. Wolfe Corporation is examining two​ capital-budgeting projects with​ 5-year lives. The​ first, project​ A, is a replacement​ project; the​ second, project​ B, is a project unrelated to current operations. The G. Wolfe Corporation uses the​ risk-adjusted discount rate method and groups projects according to​ purpose, and then it uses a required rate of return or discount rate that has been preassigned to that purpose or risk class. The expected cash flows for...
In the ________________ method, expected cash flows are used in the valuation process, and the risk...
In the ________________ method, expected cash flows are used in the valuation process, and the risk adjustment is made to the discount rate. Question 20 options: Certainty equivalent Risk-adjusted discount rate (RADR) Sensitivity analysis Scenario analysis
Why is the rate used to discount FCFF different from the rate used to discount FCFE?
Why is the rate used to discount FCFF different from the rate used to discount FCFE?
How would the discount rate used to evaluate a replacement or repair project, such as a...
How would the discount rate used to evaluate a replacement or repair project, such as a leaky roof, be different from the discount rate for an investment in a new product or service? Why would the discount rates differ?
A 5-year project has a risk-adjusted discount rate of 9% p.a. The investment would be needed...
A 5-year project has a risk-adjusted discount rate of 9% p.a. The investment would be needed right away (i.e., in 2020), and sales will occur from 2021 to 2025. You've already crunched the numbers and found the cash flows (CF) associated with the project, which are shown below. For simplicity, assume the given CF are in dollars (i.e., not thousands nor millions of dollars). Year 2020 2021 2022 2023 2024 2025 CF -187 159 109 153 157 273 Find the...
if the risk of an investment project has a beta of 1: a- projects initial cost...
if the risk of an investment project has a beta of 1: a- projects initial cost should be increased/ decreased to account for the increase/ decrease in risk. b- projects discount rate must not be adjusted based on the risks of the projects cash flows. c- projects discount rate must be adjusted based on the sources of project financing. d- average rate used for all prior projects should be used as the new projects discount rate. e- market rate of...
The current risk-free rate is 4% and the expected rate of return on the market portfolio...
The current risk-free rate is 4% and the expected rate of return on the market portfolio is 10%. The Brandywine Corporation has two divisions of equal market value, i.e. the market value of their assets is the same. The debt to equity ratio (D=E) is 3/7. The companyís debt can be assumed to present no risk of default. For the last few years, the Brandy division has been using a discount rate of 12% in capital budgeting decisions and 1...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT