Cost of capital is defined as __________________.

The maximum rate of return of that a firm must earn on its investment

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The minimum rate of return of that a firm must earn on its investment for the market value of the firm to remain unchanged

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The required rate of return

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A basic output information in capital investment decisions

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Solution

The correct option is B The minimum rate of return of that a firm must earn on its investment for the market value of the firm to remain unchanged
It is the minimum rate of return required on the investment project to keep the market value per share unchanged. In order to maximize the shareholders wealth through increased price of shares, a company has to earn more than the cost of capital.

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