4

The cost of capital: concept and measurement

One of the fundamental parameters of finance is the cost of the financial resources employed by the firm. Money is probably the only common ‘raw material’ used by any business in any industry. Understanding and assessing the cost of this commodity is essential to all managers, whatever their area of responsibility, which are all regularly spending money. From a management point of view, cost of capital is just another resource cost, it is to capital what wages are to labour. From the investor’s perspective, it compensates them for the opportunity cost of time and risk, what they could get elsewhere from comparable investments.

4.1 Thinking about risk and return: a quick overview of capital asset pricing ...

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