GK
ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Product
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Source of Finance
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Source of Material
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Source of Services
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Detailed explanation-1: -The cost of capital is used for two purposes, simultaneously, firstly, a comparison of alternative sources of funds may be made to select one which has least cost and maximum contribution to wealth maximisation, secondly, to evaluate investment proposals, as it provides a benchmark to yield a minimum return.
Detailed explanation-2: -Useful in investment decisions: The cost of capital is useful in capital budgeting decisions. Firms choose projects that give a satisfactory return on investment, which would in no case be less than the cost of capital incurred for financing.
Detailed explanation-3: -The concept of a company’s cost of capital is used in capital budgeting as a potential basic discount rate to be applied to expected future cash flows from a proposed investment project being subjected to evaluation for acceptance or rejection.