Question

For a given firm, the cost of capital (the rate or return demanded by banks or...

For a given firm, the cost of capital (the rate or return demanded by banks or potential equity investors):

A. is dependent on how the firm will ultimately use/invest the capital.
B. does not consider the capital structure of the firm.
C. is appropriate for use irrespective of the investment the firm is considering.
D. is a function of the source of the capital
E. Declines as the firm engages in relatively risky projects
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Homework Answers

Answer #1

Option A is correct. is dependent on how the firm will ultimately use/invest the capital.

Because how firm will invest the money will define the risk that the firm is going to take. Simply put, if the borrowed money or Equityholders' money is invested in a risky business or portfolio, the required rate of return will be higher. If the money is invested in low risky business then the Rerquired Rate of Return will be lower. So, the cost of Capital will depend on how the firm will invest or use the money.

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