Final answer:
The rate of return a company must earn to meet the demands of lenders and expectations of equity holders is the cost of capital, which includes both the cost of debt and equity, reflecting the minimum return investors expect for providing capital to the company.
Step-by-step explanation:
The rate of return a company must earn to meet the demands of its lenders and expectations of its equity holders is referred to as the cost of capital. This rate reflects the minimum return that investors expect for providing capital to the company and encompasses both the cost of debt and the cost of equity. When a company undertakes an investment, it aims to earn a return that is greater than this cost to create value for its shareholders.
For instance, if investors demand a 15% return on their investment due to the inherent risks and the opportunity cost of investing their capital elsewhere, the company's cost of capital would be 15%. This rate is used to discount future payments and to determine the present value of an investment. The cost of capital is pivotal in investment decisions, as it helps to ensure that the company only undertakes projects that are expected to generate returns higher than the cost of financing them.
In summary, among the given options (opportunity rate, retained earning, cost of capital, acquisition cost), the correct answer is C. cost of capital. It is an essential concept in finance as it dictates the hurdle rate for investment decisions and drives value creation for the company and its stakeholders.