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<p><strong><span>A) Barrier rate</span></strong></p> <p><strong> B) Minimum attractive rate of return</strong><strong> C) Cost of funds</strong><strong> D) Discount rate</strong></p>
Answer: a) barrier rate
I wish to elaborate and provide my views on the same:
A) Barrier rate - In some way the cost of Capital acts as a barrier which if overcome, acceptability of project decision from financial perspective can be considered as good. It's a Barrier rate also once considered from negative dimension that till actual evaluation doesn't cross this barrier project is unviable financially.
B) Minimum attractive rate of return - Yes, this also may be considered as another name for Cost of Capital. This is because, the financial return the new project under evaluation offers, should at least meet this No. else gets rejected, again before further evaluations being explored.
C) Cost of Funds - This requires a little more elaboration. Cost of funds exactly means the cost of procuring funds at historical cost and not cost of replacement of same / similar funds. A business house obtains funds from multiple sources and only cost of borrowed capital which is payable by the business house is considered to be it's cost of Funds. Even for measuring earnings this cost of funds only considered. Therefore, typically this excludes the following factors:
- Opportunity cost of funds even borrowed funds.
- Cost of funds obtained from sources where apparent payouts are not obligatory such as Share capital. Dividend payout is not obligation.
D) Discount rate - Yes this is another name of Cost of Capital as used mostly, as meaning takes it closer to the explanation of Barrier rate. Just to be more specific, a discount rate once applied to a project cash flows and the sum of such discounted value once yields Positive net (Called Net Present Value), The project is considered acceptable, that's bcos the projects actual discount rate is more than being used in the evaluation, so cross the barrier rate.
In my view, C) i.e. Cost of Funds is not exactly the name of Cost of Capital.
Thank you.
a .........................
the first alternative -A-
