Final answer:
The rate of return that a firm promises to its capital suppliers is known as the cost of capital. This rate is crucial in guiding the firm's investment decisions and satisfying the expectations of investors by combining the opportunity cost of investments and a risk premium.
Step-by-step explanation:
The correct answer to the question is D) cost of capital. The cost of capital is the rate of return that a firm promises to pay its suppliers of capital to induce them to invest in the firm. It reflects the opportunity cost of making a specific investment instead of others, as well as a risk premium associated with the uncertainty of the investment. For example, if the firm borrows at 8% for R&D and acknowledges the additional 5% return to society, it would adjust its behavior by effectively seeing the rate of return as 4%, thus investing accordingly.
In another scenario, if a financial investor requires a 15% return due to risk and alternative opportunities, this shows the cost of attracting financial capital. Therefore, the cost of capital is vital for making investment decisions and represents the minimum return a firm needs to generate on its investments to satisfy its capital providers.