In order to finance its investments, the company must convince investors to provide funds in exchange for a promise of remuneration called the cost of capital. This rate of return is none other than the profitability that investors could obtain by investing in the capital markets in the same risk class.

The calculation of the cost of capital is, therefore, a fundamental exercise for the company, because the figure obtained will make it possible to evaluate its own performance, the value created by its investment projects and the price it is ready to pay for its acquisitions.

The module describes the construction and calculation of the cost of capital from the risk analysis, while mentioning some technical difficulties related to its implementation.

Exercise related to the video

Once you’ve watched the video, you can do an exercise to practice what you’ve just learned and assess your understanding of the cost of capital.