In: Finance
A firm's cost of capital:
Select one:
a. depends on source of funds used for a project
b. is independent of firm's capital structure
c. depends on how funds are going to be spent
d. will decrease as the firm-risk increases
Ans is c. depends on how funds are going to be spent.
A firm's Cost of Capital depends on how funds are going to be spent.
The cost of capital completely depends upon financial decision making. a leader via his financial decision making process tend to select projects where a firm will invest and funds will be spended like wise. Cost of capital is the discounted rate of return at which a firm is ok to invest and a leader needs to accurately access the cost of capital of a firm to get fair returns. The cost of capital is the vital factor in designing a balanced and optimal capital structure of a firm. While designing it, the management has to consider the objective of maximizing the value of the firm and minimizing cost of capital. Comparing the various specific costs of different sources of capital, the firm's leader can select the best and the most economical source of finance and can designed a sound and balanced capital structure.