Cost of moneyEveryone uses money, and it is important to understand what factors affect the cost of money. Consider the following scenario:Due to recent political and economic events, general prices of goods and services are expected to increase significantly over the next five years. You were about to purchase a five-year bond. You now require a higher return on the bond than you did before you found out about these expected price increases. Roberto recently started a new business with money that he collected from his friends and family. All other factors being equal, which of the following financing options has a higher cost for someone who needs capital to start a business?a. Veronica invested in Roberto’s business and expects to earn a 10% rate of return every year for the next two years, irrespective of how much debt financing Roberto uses. b.Sheila expects to earn a return of 10% on her investment in Roberto’s business for the next two years, but restricts Roberto to not finance his business with debt beyond 40% of the total capital needed.
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