The cost of each type of capital depends on the
A) financial risk of the firm.
B) risk-free cost of that type of funds.
C) business risk of the firm.
D) all of the above.

Question

Quizplus · Accepted Answer

The cost of each type of capital depends on all three factors - financial risk of the firm, risk-free cost of that type of funds, and business risk of the firm. The financial risk of the firm is reflected in the cost of debt, which is determined by the interest rate the company must pay to borrow funds. The risk-free cost of funds is the rate an investor would earn if they invested in a risk-free security like a government bond. The business risk of the firm is reflected in the cost of equity, which is determined by the expected rate of return required by investors to invest in the company's stock. Therefore, all three factors are crucial in determining the overall cost of capital for a firm.

The Cost of Each Type of Capital Depends on the