Match term with the description:
Cost of Capital
- O The amount of capital expenditures made, or to be made, at which the Firm's marginal cost of capital increases.
- O The return required by providers of capital loaned to the firm.
- O The average cost of a firm's financial capital when averaged across all of its outstanding debt and equity capital.
- O This concept argues that a firm's retained earnings are not free to the firm.
- O A firm's shareholder wealth-maximizing combination of debt, and common and preferred stock.
- O These costs are generally expressed as a percentage of the total amount of securities sold, including the costs of printing the security certificates, applicable taxes, and issuance and marketing fees.
- O A table or graph of a firm's potential investments listed in decreasing order of their internal rates of return.
- O The weighted average cost of the last dollar raised by a firm, or the firm's incremental cost of capital.
- O This term refers to the individual sources of the firm's financing, including its debt, preferred stock, retained earnings, and newly issued common equity.
- O The minimum return that must be earned on a firm's investments to ensure that the firm's value does not decrease.
Cost of Capital:
This question deals with the concept of cost of capital. Cost of capital is the rate or return required to compel an investor to invest in a financial security or project. It is the minimum return required to make the venture worthwhile. The cost of capital is directly related to the perceived risk of the investment or project. As the perceived riskiness increases, so does the cost of capital. Conversely, as the perceived riskiness declines, the cost of capital also declines.
Incidentally, the cost of capital it often comprised of a variety of funding sources, including debt, common equity, and preferred equity. A common method of aggregating these sources and determining a single cost of capital measure is the weighted average cost of capital formula.
Answer and Explanation:
Many of the answers provided are closely related. Therefore, identifying the correct answer is difficult and debatable. Nevertheless, the best possible answer, which describes the term "cost of capital" in the most direct and focused manner, is as follows:
"The return required by providers of capital loaned to the firm."
Learn more about this topic:
from Finance 101: Principles of FinanceChapter 14 / Lesson 1