Question

Farmer's Supply, Inc. is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate that should be used to evaluate this proposed expansion. Which one of the following terms is used to describe the approach Farmer's Supply is taking to establish an appropriate discount rate for the project?
a. Equity approach
b. Aftertax approach
c. Subjective approach
d. Market play
e. Pure play approach

Answer 1

Answer:

E)Pure play approach

Explanation:

From the question we are informed about, Farmer's Supply, Inc. who is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate that should be used to evaluate this proposed expansion. In this case, the terms used to describe the approach Farmer's Supply is taking to establish an appropriate discount rate for the project is Pure play approach.

Pure play approach In finance, can be regarded as be used in estimating cost of equity capital especially of that of

private companies, and this involve the examination of beta coefficient of single focused companies as well as public companies. In this approach

company set it's focuses on a particular single type product.