equity effects
debt effects
inflation effects
opportunity effects
Answer is Right!
Answer is Wrong!
The correct answer is: C. inflation effects
Real interest rate and real cash flows are calculated by adjusting nominal interest rates and nominal cash flows for inflation. This means that they do not include the effects of inflation.
Equity effects are the effects of changes in the value of equity on a company’s financial statements. Debt effects are the effects of changes in the value of debt on a company’s financial statements. Opportunity effects are the effects of forgone opportunities on a company’s financial statements.
Here is a more detailed explanation of each option:
- A. Equity effects are the effects of changes in the value of equity on a company’s financial statements. Equity is the ownership interest in a company. When the value of equity increases, the company’s assets and liabilities increase, and its equity also increases. When the value of equity decreases, the company’s assets and liabilities decrease, and its equity also decreases.
- B. Debt effects are the effects of changes in the value of debt on a company’s financial statements. Debt is the money that a company borrows from lenders. When the value of debt increases, the company’s assets and liabilities increase, and its debt also increases. When the value of debt decreases, the company’s assets and liabilities decrease, and its debt also decreases.
- C. Inflation effects are the effects of changes in the general level of prices on a company’s financial statements. Inflation is a general increase in the prices of goods and services. When inflation increases, the value of money decreases. This means that a company’s nominal interest rates and nominal cash flows will not be as valuable in real terms. To account for inflation, real interest rates and real cash flows are calculated by adjusting nominal interest rates and nominal cash flows for inflation.
- D. Opportunity effects are the effects of forgone opportunities on a company’s financial statements. Opportunity costs are the costs of not taking an action. When a company makes a decision, it is forgoing the opportunity to take other actions. The opportunity costs of a decision are the benefits that the company would have received if it had taken the other actions. Opportunity effects are not included in real interest rates and real cash flows because they are not directly related to the time value of money.