The cost of capital of a firm is ______________.
A. The dividend paid on the equity capital
B. The weighted average of the cost of various long-term and short-term sources of finance
C. The average rate of return it must earn on its investments to satisfy the various investors
D. The minimum rate of return it must earn on its investments to keep its investors satisfied
Answer: Option B
Solution (By Examveda Team)
The cost of capital of a firm refers to the expense a company bears to finance its operations. It is calculated as the weighted average of the cost of various long-term and short-term sources of finance. This includes the cost of equity, debt, preference shares, retained earnings, and other sources of funds. By determining the weighted average cost of each source of finance, a firm can evaluate the overall expense incurred in raising capital for its business activities. This metric is essential for making investment decisions and assessing the profitability of projects.This Question Belongs to Commerce >> Financial Management
Option B should be the answer.