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The cost of each type of capital depends on: A) risk-free cost of that type of funds. B)...

Question:

The cost of each type of capital depends on:

A) risk-free cost of that type of funds.

B) business risk of the firm.

C) financial risk of the firm.

D) All of the above.

Cost Of Capital:

The cost of capital is the return required by the investors or the providers of the capital on their investment. There are two major types of capital i.e. Debt and Equity. Other sources are the variations of these two.

Answer and Explanation:

The cost of each type of capital depends on:

D) All of the above.


Let's see why all options are applicable:

A) risk-free cost of that type of funds. - This is the rate charged on any type of fund and hence is included.

B) business risk of the firm. - This would increase risk and increase compensation.

C) financial risk of the firm. - Again there is an increase in risk and an increase in compensation required.


Learn more about this topic:

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Required Return vs. Cost of Capital

from Finance 101: Principles of Finance

Chapter 14 / Lesson 1
4.6K

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