What is meant by the term "cost of capital"?

The term "cost of capital" refers to the expected return required by providers of capital, which includes equity investors and lenders. It represents the opportunity cost of investing in a company versus investing in other securities with similar risk. Essentially, it reflects the minimum return that a company must earn on its investment projects in order to satisfy these capital providers. This concept is crucial in the field of finance and sustainability accounting because it helps determine whether a project or investment will create value or not.

This understanding is pivotal for companies as they seek to make informed decisions on investments. When evaluating potential projects, organizations compare the expected returns of the projects against the cost of capital to ensure that they are meeting or exceeding the minimum return expected by their investors.

The other choices, while related to finance, do not accurately define "cost of capital." For instance, the internal rate of return needed on investments is a measure used to evaluate the profitability of potential investments, but it does not encompass the broader expectation of returns required by all capital providers. Total expenses incurred in obtaining capital may refer to actual costs like interest expenses or fees but does not capture the concept of expected returns. Variable costs associated with capital projects are operational costs incurred once the project is underway and are not related to the return