Question

The cost of capital may also be called _________

a. The minimum rate of return.
b. The required rate of return
c. The desired rate of return.
d. All of the answers are terms that may be used to mean the same thing as the cost of capital.

Answer 1

The cost of capital can be referred to as the minimum rate of return, the required rate of return, or the desired rate of return, encompassing all these concepts. It represents the rate a company must earn on its investments and is influenced by the opportunity cost of capital and risk premiums.

Step-by-step explanation:

The cost of capital can be described using several terms. It is often called the minimum rate of return that a company must earn on its investments to maintain its market value and attract funds. It can also be termed as the required rate of return, which a firm needs to achieve in order to justify the risk taken by its investors.

An example of how a financial investor decides on this rate is by considering the opportunity cost of capital, which includes not only the return on other investment opportunities but also a risk premium for potential higher risk associated with the investment.