The correct answer is: B. Composite cost
The composite cost of capital is the weighted average of the costs of all the different sources of capital a company uses. It is calculated by multiplying the cost of each source of capital by its proportion of the total capital and then adding up the products.
The cost of capital is an important concept in finance because it is the rate of return that a company must earn on its investments in order to satisfy its investors. If a company’s return on investment is less than its cost of capital, then it is not generating enough profit to cover its costs and will eventually go out of business.
There are a number of different sources of capital that a company can use, including debt, equity, and retained earnings. The cost of each source of capital will vary depending on a number of factors, such as the riskiness of the investment, the maturity of the debt, and the tax treatment of the income.
The composite cost of capital is used in a number of financial calculations, such as the capital budgeting process and the valuation of a company. It is also used to set the hurdle rate for new investments.
The other options are incorrect because:
- A. Specific cost is the cost of a particular source of capital, such as debt or equity.
- C. Implicit cost is the cost of using resources that are owned by the company, such as labor or equipment.
- D. Simple average cost is the average of the costs of all the different sources of capital, without taking into account their proportions of the total capital.