The cost of capital:

Question

Quizplus · Accepted Answer

The cost of capital for risky investments is normally higher than the firm's borrowing rate as it reflects the risk associated with the investment. The cost of capital is the rate of return required by investors to invest in the company's projects, which takes into account the risk of the investment. Therefore, it is typically higher than the rate the company pays for borrowing. Option A is incorrect because the expected rate of return is a component of the cost of capital, but it is not the cost of capital itself. Option B is incorrect because although the risk-free rate of return is a component of the cost of capital calculation, it is not the cost of capital itself. Option C is incorrect as it only represents a portion of the overall cost of capital.

The Cost of Capital