Fin542 Notes -

Investments always involve some level of risk, and understanding the relationship between risk and return is essential in financial management. The Capital Asset Pricing Model (CAPM) is a widely used model that describes the relationship between risk and return:

The cost of capital is a critical concept in financial management, representing the minimum return a company must earn on its investments to satisfy its creditors, owners, and other stakeholders. The cost of capital is calculated using the following formula: fin542 notes

Capital budgeting is the process of evaluating and selecting investments in long-term assets, such as property, plant, and equipment. The goal of capital budgeting is to maximize shareholder value by investing in projects that generate returns above the cost of capital. Investments always involve some level of risk, and

C os t o f C a p i t a l = W A CC = V E ​ × R E ​ + V D ​ × R D ​ × ( 1 − T ) The goal of capital budgeting is to maximize

R i ​ = R f ​ + β i ​ × ( R m ​ − R f ​ )