Question

You are provided with the following statements regarding cost of capital: i. The cost of capital...

You are provided with the following statements regarding cost of capital:

i. The cost of capital is the discount rate that may be used for valuation purposes.
ii. The cost of capital is the link between long-term financing decisions.
iii. The cost of capital is the rate of return required by a firm in order to attract funds.
iv. The cost of capital is the rate of return a firm must earn on its investments in order to maintain the market value of its ordinary shares.


Which of the above statements is/are correct?

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Answer #1

The cost of capital is the rate of return a firm will be earning on the investment in order to maintain the market value of its ordinary shares and cost of capital will be helpful in determination of minimum rate of return required by the investor.

Cost of capital is also discount rate which will be used for the valuation purposes.

Correct answer will be option (I) the cost of capital is the discount rate that may be used for valuation purpose

AND

(V) the cost of capital is the rate of return a firm must earn on an investment in order to maintain the market value of ordinary share.

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