CFA Practice Question

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CFA Practice Question

Which of the following statements is true?

I. Interest rates ignore the effect of expected inflation on the return on debt.
II. The cost of capital ignores the effect of expected inflation on the return on capital.
III. Projected cash flows should reflect the effects of inflation.
A. III
B. II and III
C. I and III
Explanation: For capital budgeting purpose, sale prices and costs should incorporate the effect of inflation.

User Contributed Comments 1

User Comment
murli Interest rates and Eq. returns are adjusted for Inflation Premium, while CF should also be adjusted for inflation.
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