Correct Answer:
A. Return expected by investors
The cost of capital is a fundamental concept in finance, representing the rate of return a company must earn on an investment project to maintain its market value and attract new capital. It is essentially the minimum acceptable rate of return.
- The correct answer, Return expected by investors, accurately defines the cost of capital. Investors (shareholders and lenders) provide funds to the company and expect a certain return for their investment and the risk taken. This expected return becomes the cost for the company to raise that capital.
- Company profit (B) is the result of operations, not the cost of obtaining funds.
- Tax rate (C) is a component that affects the after-tax cost of debt, but it is not the cost of capital itself.
- Interest rate only (D) is too narrow; it only refers to the cost of debt, whereas the cost of capital considers all sources of financing, including equity.
Therefore, the cost of capital reflects the opportunity cost of funds from the investors' perspective.