Question

The cost of capital is ___________.

a. the minimum rate of return an investment project must generate in order to pay its financing costs.
b. the minimum rate of return an investment project must generate in order to pay its financing costs plus a reasonable profit.
c. the maximum rate of return an investment project must generate in order to pay its financing costs.
d. the maximum rate of return an investment project must generate in order to pay its financing costs plus a reasonable profit.

Answer 1

The answer is A. The minimum rate of return an investment project must generate in order to pay its financial costs.

Step-by-step explanation:

Cost of capital is the required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. When analysts and investors discuss the cost of capital, they typically mean the weighted average of a firm's cost of debt and cost of equity blended together.

The cost of capital represents a hurdle rate that a company must overcome before it cn generate value, and it is used to extensively in the capital budgeting process to determine whether a company should proceed with a project.

Answer 2

the minimum rate of return an investment project must generate in order to pay its financing costs.

Step-by-step explanation:

In Economics, the cost of capital which is an opportunity cost is the minimum rate of return an investment project must generate in order to pay its financing costs.

From an investor's perspective, it is the weighted average cost of capital and perceived as the required rate of return an investment is supposed to generate on the average for financing assets.