A firm must earn the marginal cost of capital on new investments if it is to meet the return requirements of creditors and equity investors.

Question

Quizplus · Accepted Answer

This statement is true. The marginal cost of capital represents the cost of obtaining additional funds from various sources such as debt, equity, or retained earnings. If a firm wants to maintain its financial soundness and keep its creditors and equity investors satisfied, it must earn a rate of return on new investments that at least equals its cost of capital. Otherwise, the firm may suffer from financial distress, loss of creditworthiness, and decreased shareholder value.

A Firm Must Earn the Marginal Cost of Capital on New