The correct answer is C. Cost of capital does not comprise any risk premium.
The cost of capital is the rate of return that a company needs to earn on its investments in order to satisfy its investors. It is a measure of the riskiness of a company’s investments and is used to calculate the value of a company’s equity.
The cost of capital is made up of two components: the risk-free rate of return and the risk premium. The risk-free rate of return is the rate of return that an investor can earn on a risk-free investment, such as a government bond. The risk premium is the additional return that an investor requires to invest in a risky investment, such as a company’s stock.
The cost of capital is a critical concept in finance and is used in a variety of financial decisions, such as capital budgeting, valuation, and mergers and acquisitions.
Here is a brief explanation of each option:
A. The cost of capital is required rate of return to ascertain the value of the firm. This is correct. The cost of capital is the rate of return that a company needs to earn on its investments in order to satisfy its investors. It is a measure of the riskiness of a company’s investments and is used to calculate the value of a company’s equity.
B. Different sources of funds have a specific cost of capital related to that source only. This is correct. The cost of capital is a weighted average of the costs of the different sources of funds that a company uses. The weights are based on the relative proportions of each source of funds in the company’s capital structure.
C. Cost of capital does not comprise any risk premium. This is incorrect. The cost of capital is made up of two components: the risk-free rate of return and the risk premium. The risk-free rate of return is the rate of return that an investor can earn on a risk-free investment, such as a government bond. The risk premium is the additional return that an investor requires to invest in a risky investment, such as a company’s stock.
D. Cost of capital is basic data for NPV technique. This is correct. The cost of capital is one of the inputs into the net present value (NPV) technique. The NPV technique is a method of evaluating capital investments. It calculates the present value of the future cash flows from an investment and compares it to the initial investment cost. If the NPV is positive, the investment is considered to be profitable.