The price used to sell goods or services between subsidiaries in ...

[Lobcity]

The price used to sell goods or services between subsidiaries in a company is
 
  A) the tax avoidance price.
  B) set at the marginal cost of the producing subsidiary.
  C) determined by the minimum of the average cost curve.
  D) a transfer price.

Question 2

Describe the Capital Asset Pricing Model (CAPM) and how it is used in capital budgeting decisions.
 
  What will be an ideal response?

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Answer to Question 1

D

Answer to Question 2

CAPM is a procedure for adjusting a measure of the required rate of return on a firm's stock for risk. This risk-adjusted measure of the required rate of return on a firm's stock is used as the opportunity cost of capital in equity financing of a capital project. The projected cash flows from the project are discounted back to a net present value using this risk-adjusted rate of return. The risk adjustment is based on the Beta value of a firm's stock: the ratio of the volatility in the rate of return on a firm's stock to the volatility in the rate of return on a market portfolio of stocks.