The answer to the question is highlighted in red. Explanations are highlighted in green.
4. In essence, who sets (determines) the cost of capital for a firm?
a. top executives, such as the chief executive officer (CEO) and the chief financial officer (CFO)
b. Congress
c. investment bankers
d. insurance companies
e. investors
The
firm’s cost of capital represents the “price” it pays to use funds provided by
investors. Investors will not provide funds unless they earn a minimum rate of
return—that is, the minimum rate of return they demand. Because the firm must
pay the return demanded by investors to attract funds, it is the investors who
determine the firm’s cost of capital.