Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC?

a. Subjective cost
b. Pure play cost
c. Cost of equity
d. Cost of debt
e. Weighted average cost of capital

c. Cost of equity

Explanation:

The term used to refer is the cost of equity because this cost ‘represents the compensation the market demands in exchange for owning the asset and bearing the risk of ownership’. Kate’s 100 shares represent her rate of return in investing in ABC stock, representing her cost of equity spend on that ABC stock. Moreover, Katie chose well investing using this method because in the long run returns more profit than the cost of debt, where she would collect exactly how much she invested, but no interest rate on it.  

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