Final answer:
The cost of capital for most firms is typically between 10% and 20%, reflecting the required rate of return to satisfy investors and maintain market value, which is usually above the prime rate.
Step-by-step explanation:
For most firms, the cost of capital is probably between 10% and 20% (Option C). The cost of a firm's capital is the rate of return it must earn on its investments to maintain its market value and appeal to investors. It includes the cost of debt and the cost of equity. The prime rate, which is based on the Federal Reserve's lending rate to banks, is often used as a reference point, but the cost of capital for a firm is typically higher than the prime rate to account for risk and other factors.
Interest rates, including the prime rate, significantly affect a firm’s investment decisions. The prime rate influences the interest rates that banks charge businesses for loans. By understanding the firm's effective rate of return compared to the cost of capital, we can determine investment behavior. If a firm can capture a return that is greater than the cost of capital, it's more likely to make an investment.