Factors Affecting the Cost of Capital Quiz

<p>They raise their required rate of interest</p> Signup and view all the answers

<p>It increases</p> Signup and view all the answers

<p>The factors that determine and affect the cost of capital of a firm are general economic conditions and market conditions.</p> Signup and view all the answers

<p>General economic conditions determine the demand for and supply of capital within the economy as well as the level of expected inflation. An increase in the demand for money without an equivalent increase in supply leads to an increase in the required rate of interest, resulting in a change in the cost of capital. Inflation also leads to an increase in the cost of capital as investors require a higher rate of return to compensate for the loss in purchasing power of money.</p> Signup and view all the answers

<p>As the risk associated with an investment increases, the investor requires a higher rate of return to compensate for the additional risk. This increase in required rate of return is called the risk premium.</p> Signup and view all the answers

<p>'Risk premium' refers to the additional returns or compensation required by investors for purchasing securities with significant risk. It is the difference between the expected rate of return on a risky investment and the risk-free rate of return.</p> Signup and view all the answers

<p>Market conditions play a significant role in determining the cost of capital. When investors face a higher level of risk in the market, they will demand a higher rate of return to make the investment attractive. This increase in the required rate of return leads to an increase in the cost of capital.</p> Signup and view all the answers