Question

question 22
which of the following discount rates is most appropriate when evaluating a low - risk change in short - term financial management
wacc
prime interest rate
90 - day treasury - bill yield
line of credit interest rate
question 23

Explanation:

To determine the most appropriate discount rate for a low - risk, short - term financial management change:

1. WACC (Weighted Average Cost of Capital): WACC is used for long - term, firm - wide investment decisions that involve a mix of debt and equity financing. It is not suitable for short - term, low - risk decisions as it accounts for the overall cost of capital for the firm, which is too broad for a short - term, low - risk project.
2. Prime interest rate: The prime interest rate is the rate that banks charge their most credit - worthy customers. It is related to commercial lending and is not specifically tailored for short - term, low - risk financial management decisions in the context of evaluating the time value of money for such projects.
3. 90 - day Treasury - bill yield: Treasury bills are short - term (usually less than a year, with 90 - day T - bills being very short - term) and are considered to be nearly risk - free as they are backed by the government. For a low - risk, short - term financial management change, using the yield on a 90 - day Treasury bill as the discount rate is appropriate because it represents the risk - free rate for a short - term period, and the project is low - risk, so a risk - free or near - risk - free rate is suitable.
4. Line of credit interest rate: A line of credit interest rate is the rate at which a firm can borrow money from a line of credit. It is a borrowing rate and is not the appropriate rate for discounting cash flows in a short - term, low - risk financial management decision as it is related to debt financing for the firm and not to the time value of money for a low - risk, short - term project.

Answer:

C. 90 - day Treasury - bill yield