The correct answer is: B. cost of equity
The cost of equity is the rate of return that a company must earn on its equity capital in order to satisfy its investors. It is a measure of the riskiness of a company’s equity and is used to calculate the company’s weighted average cost of capital (WACC).
The cost of equity is calculated using a variety of methods, including the capital asset pricing model (CAPM), the dividend discount model (DDM), and the build-up method.
The CAPM is a model that estimates the cost of equity based on the risk-free rate of return, the market risk premium, and the company’s beta. The DDM is a model that estimates the cost of equity based on the company’s expected future dividends and the required rate of return on equity. The build-up method is a model that estimates the cost of equity based on a company’s risk-free rate of return, a risk premium for equity, and a premium for size.
The cost of equity is an important factor in a company’s capital budgeting decisions. It is used to calculate the NPV of a project and to determine whether a project is worth undertaking.
The other options are incorrect because:
- Interest rate is the rate of interest that a borrower pays to a lender for the use of money.
- Debt rate is the rate of interest that a borrower pays on a loan.
- Investment return is the profit that an investor makes on an investment.