The cost of each type of capital depends on the risk-free cost of that type of funds, the business risk of the firm, and the financial risk of the firm.

Question

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The cost of capital is influenced by various factors, including the risk-free rate, business risk, and financial risk. The risk-free rate represents the cost of capital that investors expect to receive from a risk-free investment. The business risk of a firm refers to the risk associated with the operations of the firm, while financial risk relates to the use of debt financing by the firm. The cost of each type of capital is determined by these factors, among others.

The Cost of Each Type of Capital Depends on the Risk-Free