Question

The appropriate risk-free rate to use when calculating the cost of equity for a firm is

A) a long-term Treasury rate.
B) a short-term Treasury rate.
C) an equal mix of short-term and long-term Treasury rates.
D) None of the above

Answer 1

The appropriate risk-free rate to use when calculating the cost of equity for a firm is a long-term Treasury rate.

Step-by-step explanation:

The appropriate risk-free rate to use when calculating the cost of equity for a firm is A) a long-term Treasury rate. The risk-free rate is used as the baseline for estimating the expected return on equity. Long-term Treasury rates are typically considered the most reliable measure of the risk-free rate because government bonds are considered to have virtually zero default risk.