The cost of capital for a project in Spain should ______.
A) be a function of the riskiness of the project
B) equal the minimum rate of return necessary to induce investors to buy or hold the firm's stock
C) equal the nominal required return for a similar U.S. investment
D) equal the parent's weighted average cost of capital
E) equal the rate used by Spanish investors to capitalize corporate cash flows

Question

Quizplus · Accepted Answer

The cost of capital for a project in Spain should be a function of the riskiness of the project. The riskier the project, the higher the cost of capital should be to compensate investors for taking on the additional risk. It may not necessarily be the same as the cost of capital for a similar U.S. investment, the minimum rate of return needed to induce investors to buy or hold the firm's stock or the parent's weighted average cost of capital. The rate used by Spanish investors to capitalize corporate cash flows may also not be a relevant factor as it may vary based on individual investor preferences and market conditions.

The Cost of Capital for a Project in Spain Should