The Cost of Capital Is

question 65

Multiple Choice

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.

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Definitions:

Inflation Risk

The risk that the value of assets or income will be eroded as inflation diminishes the value of a country’s currency.

Firm-Based Risk

Refers to the potential for financial loss arising from factors unique to a specific company, such as management decisions, product demand, or operational efficiency.

Market-Based Risk

The risk of losses stemming from factors that affect the overall market, including fluctuations in interest rates, stock prices, and currencies.

Investment Risk

The possibility of losing some or all of the original investment, often measured by the volatility of returns.