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Sagot :
The cost of capital for the oil exploration division closest to 10%.
Option D is correct.
Calculating the problem:
cost of capital = risk free rate + beta × market risk premium
= 3% + 1.4 × 5%
= 10%
What is capital cost?
The cost of capital is the minimum rate of return or profit a business must generate before it can create value. It is calculated by the company's accounting department to determine whether the financial risk and investment is justified.
How do you calculate your cost of capital?
Find the difference between market returns and risk-free returns. This difference is multiplied by beta, which measures market volatility. Add this product to the risk-free interest rate. The total is the cost of capital.
Why is it important to determine the cost of capital?
In addition, investors use cost of capital as one of the financial metrics they consider when evaluating a company as a potential investment destination. The cost of capital figures are also important. This is because it is used as the discount rate for the firm's free cash flow in the DCF analysis model.
Learn more about cost of capital:
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